Mixed fate of relief loans could dampen Malaysia’s banking recovery, S&P says

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KUALA LUMPUR (March 1): A rebound in profits in 2021 is not the whole story for Malaysian banks, as an uneven recovery in loans under moratoria could continue to weigh on this year, S&P Global Ratings said.

In a statement on Tuesday, March 1, the ratings agency said at least two drivers of last year’s earnings rebound should remain on track: lower credit costs (an indicator of provisions) and accelerating loan growth.

However, he said last year’s margin improvement has likely run its course for now.

He said non-performing loans (NPLs) could reach 2.5% to 3.0% over the next 12 months after various moratorium programs expire by mid-2022 as expected.

This compares to an NPL ratio of 1.4% in 2021.

S&P Global Ratings credit analyst Nancy Duan said small and medium-sized business borrowers [SMEs] and low-income households are the most vulnerable segments under the loan relief programs offered by Malaysian banks.

“Lenders with greater exposure to SME lending and consumer banking will lag in their recovery compared to those with established niches in the wealthy retail segment and large corporations,” she said.

S&P estimates that loans to SMEs and low-income households represent approximately 30-35% of the industry-wide loan portfolio.

He said a recently announced RM40 billion government relief package that specifically targets micro, small and medium-sized enterprises and the informal sector will help facilitate the resumption of much-needed business by small businesses.

Still, he said that shouldn’t prevent the underlying credit trend for these borrowers from weakening.

On the other hand, he said the industry’s high provision coverage for non-credit impaired loans, at around 1.3% at the end of 2021, is positive for credit costs.

He said that compares to the low coverage of 0.8% pre-COVID.

Duan said banks could start unwinding the accumulated provision buffer for non-impaired loans in the second half of 2022, once the dust of moratorium uncertainties settles.

“This could significantly reduce the need for additional provisions despite increasing NPLs,” she said.

S&P said it was likely to revise its 2022 sector cost of credit forecast significantly downward from the current 55-60 basis points if Malaysia’s economic recovery remains firm and transitions to a rampant phase. is proceeding as planned.

Still, he doesn’t think the cost of banking sector credit will normalize to pre-COVID levels anytime soon, unlike his peers in Singapore.

S&P estimates that Malaysian banks will increase lending by 6% in 2022, compared to loan growth of 4.5% in 2021.

Specifically, he said higher capital spending, a booming oil and gas market and the competitive cost of funding bank loans amid volatile capital markets will boost demand for loans among large companies.

The agency said it will take longer for consumer and SME lending to recover due to still fragile consumer confidence, the extent of SME stress throughout COVID-19, rising inflation and already high household debt.

S&P said Malaysian banks will face more downward pressure on net interest income (NIM) in the first half of 2022 as their cost of funding begins to rise and competition for deposits intensifies. .

He said the NIM could stabilize in the second half.

He said this was because Bank Negara would likely raise its overnight rate by 25 basis points by June, meaning local banks will benefit from a slight uptick in loan yields.