KUALA LUMPUR: The banking sector is expected to be under constraints this year especially in terms of income and loan growth due to effects from the Covid-19 but the well-capitalised Malaysian banks will be facing the headwinds from a position of strength and make a strong recovery.
MIDF Amanah Investment Bank Bhd’s senior analyst Imran Yassin Yusof felt there are still a lot of uncertainties plaguing the banking sector in terms of the impact of the pandemic on the local economy.
“It is very difficult to give a timeline for when banks would recover as it depends on how fast or the magnitude of the economic recovery
“However, we believe Malaysian banks will be facing the headwinds from a position of strength, due to the fact that Malaysian banks are well capitalised, hence they would be able to weather the current crisis. We opined that Malaysian banks will recover as the economy starts to recover,” he added.
Meanwhile, a report said Malaysian banks’ credible underwriting standards and sufficient earnings, as well as capital buffers, should help them contain impacts from the virus.
But as China is Malaysia’s largest export market, a sharp slowdown in China would erode corporate earnings, it added.
In an effort to assist individuals and businesses mitigate the adverse impact of the pandemic, the government had dished out RM250 bil worth of stimulus measures, the PRIHATIN Rakyat Economic Stimulus Package (PRIHATIN)
Included in the stimulus package is a six-month loan moratorium to all individual and small and medium enterprise (SME) borrowers from April 1, excluding credit card balances which can be converted to term loans of not more than three years with interest cap of 13% a year.
Analysts opined the moratorium would test the resilience of the banking institutions as it will strain their liquidity and working capital, which are also needed to cover interest expense, overheads and for lending activities.
Commenting on the moratorium, Putra Business School associate Prof Dr Ahmed Razman Abdul Latiff estimated that banks would incur some RM2 bil losses in income with the lifting of accrued interest on loans, with banks offering predominantly fixed-rate financing suffering more.
He said with major shareholders of all nine local banks listed on Bursa Malaysia, including government-linked institutions such as the Employees Provident Fund, Permodalan Nasional Bhd and Khazanah Nasional Bhd, it is worth noting that their reduced profits for the year would also mean lower dividend for their depositors and investors.
“Perhaps the middle ground (could be that) after waiving the accrued interest, the banks should receive some form of tax exemption so that their annual profits will not be affected much.
“This way, the affected individuals can still benefit from the moratorium and banks will not suffer from the modification loss,” he added.
Meanwhile, Bank Muamalat Malaysia Bhd economics head Izuan Ahmad said the adverse impact of slower economic growth on the local banking sector is inevitable as the credit standing and financial condition of both the household and business segments would determine the loan/financing growth and asset quality of the banking system.
Citing Bank Negara Malaysia’s revision of its forecast Gross Domestic Product (GDP) growth of -2% to 0.5% for 2020, he said the local banking system is also expected to undergo slower loan/financing growth of 1%-2% this year.
Asset quality is now projected to be weakening (nearing 2% in impaired ratio) due to higher payment risks from both the household and business segments, he said.
Izuan said the banking sector is expected to see earnings loss, particularly for those with higher exposures to Hire Purchase (HP) financing, due to the moratorium interest waiver, coupled with the Net Interest Margin (NIM) compression due to continuous cuts in OPR which could see banks net profit reduced up to an estimated 20%.
According to a research note, Affin Bank Bhd is expected to be the hardest hit by this, because its proportion of HP loans is the highest among local banks, at 23.2%, followed by Public Bank Bhd with 14.5% and AMMB Holdings Bhd with 14.2%.
However, Izuan commented that the local banking system’s capital and liquidity positions are still deemed to be sufficient in order to curb the risks.
He also noted that recovery of the sector would be highly dependent on the overall global and local economic and financial recovery as well as recuperation from the pandemic and its resulting negative impacts.
In a base case scenario where the pandemic could be contained by the end of this year, the growth momentum is predicted to pick up in 2021, with Malaysia among the countries projected to improve significantly at 6.4% in GDP growth as forecast by the World Bank.
Nevertheless, the prolonged outbreak of the virus beyond 2020 would definitely result in a longer recovery period for the local economy, thus delaying the return to normalcy for the local banking sector. – May 11, 2020, Bernama
