MALAYSIA’S announcement of another sweeping loan moratorium will further delay the recognition of non-performing loans (NPLs) into 2022 and may even lengthen the time needed for banks’ credit costs and profitability to revert to normal.
The opt-in nature of the latest scheme suggests that the amount of loans seeking moratorium will be materially lower than in 2020 although Fitch Ratings expect the proportion to still rise significantly in light of continued financial strains households and small businesses face from a prolonged lockdown.
“The new moratorium will delay the peak in NPL ratios to later in 2022 than we previously expected,” the rating agency pointed out. “We have thus revised our projection of the banking system’s NPL ratio to rise only marginally by end-2021 from 1.6% as of May 2021 and we now expect it to peak at below 2.5%.”
Recall that the Government re-introduced a blanket six-month moratorium on all loans to individuals and micro, small and medium enterprises (MSME) on June 28 as part of a RM150 bil relief package amid an extended nationwide lockdown.
This echoes the first six-month moratorium implemented for the same borrower segments from April to September 2020, except that they will now have to apply for the deferral although approvals will be unconditional and automatic.
According to Fitch Ratings, the moratorium’s temporary suppression of NPL ratios until at least 1Q 2022 suggests that loan-loss allowances to impaired loans are becoming less accurate indicators of banks’ loss-absorption buffers in the interim.
“Allowances as a percentage of loans have become more relevant – rising to 1.8% for the banking system by May 2021 – from 1.2% at end-2019,” suggested the rating agency.
“Assessments of banks’ resiliency will also continue to take into account the different collateralisation inherent in the banks’ lending models.
“Reported NPLs may stay low in 2021 with problematic retail and MSME loans not falling due until 2022 but the challenging economic environment remains.”
Moving forward, Fitch Ratings believed that banks’ expected credit loss models will continue to include higher macroeconomic variable and management overlays to account for the elevated uncertainty which means credit costs will remain high in 2021 and 2022 albeit lower than 2020’s levels.
“Reduced visibility into customers’ financial health and repayment behaviour may also give rise to heightened caution among banks and lower their appetite for loan growth,” added the rating agency. – July 1, 2020
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