Published on 26 Mar 2020.
Sweeping loan relief measures announced by Bank Negara Malaysia (BNM) this week will, in RAM Ratings’ view, preserve the stability of the banking system amid disruptions caused by Covid-19. The introduction of these measures comes on the heels of broad-based spillover effects across the economy. Although the forbearance will provide a much-needed breather to borrowers in the interim, we believe it could defer the crystallisation of some credit risk to 2021, especially if the pandemic’s impact lasts beyond the payment holiday.
These initiatives will shield banks’ reported asset-quality indicators against short-term difficulties and curb delinquencies that would otherwise occur. The automatic six-month moratorium period will be excluded when determining delinquency status while rescheduled and restructured loans need not be classified as impaired; these treatments apply to ringgit-denominated loans that are not more than 90 days overdue. We therefore expect the industry’s gross impaired loan (GIL) ratio to come in at around 1.6% this year (end-January 2020: 1.56%), instead of our earlier forecast of 1.7%-1.9%. Nonetheless, the absence of repayments during the moratorium renders it hard to gauge the true extent of the underlying weakness.
The moratorium will take effect on 1 April 2020 and is applicable to all loan repayments (except credit cards) for individuals and SMEs, benefitting 71% of the industry’s total loans (without development financial institutions). Banks will also convert credit card balances into term loans for cardholders who have failed to meet minimum repayments consecutively for the last three months while facilitating requests from corporates for deferments or restructuring. We highlight that interest will still accrue during the moratorium period and banks will continue to recognise interest income.
RAM expects a higher credit cost ratio of 40-50 bps this year (2019: 30 bps excluding one-offs), against our previous estimate of 50 bps, for Malaysia’s eight anchor banking groups. Banks may build up provisions to preempt potentially higher defaults next year as well as deterioration in their overseas loans. Having said that, BNM stipulates that loans subject to the moratorium should not result in a stage transfer under the three-stage provisioning model of Malaysian Financial Reporting Standard 9 (MFRS 9), unless accompanied by other factors. The regulator also expects banks to incorporate in their MFRS 9 models the various support measures intended to address the economic blow. This regulatory guidance will moderate the incremental provisions that banks incur.
BNM’s initiatives further involve a temporary removal of the regulatory reserve requirement that serves as a buffer for credit losses. This will reduce banks’ loan loss coverage, although slightly increasing their common equity tier-1 capital in return. RAM evaluates the loss absorption capacity of banks holistically, taking into consideration both loan loss coverage and capital buffer. As such, we see the exemption of the regulatory reserve requirement as largely neutral to banks’ overall loss absorbency, all else being equal.
To support efforts made by banks to assist borrowers, BNM has also temporarily relaxed requirements on capital, funding and liquidity, with buffers to be rebuilt after end-2020. The drawdown of these prudential buffers cannot be channelled towards dividends or share buybacks. In addition, the central bank assures that liquidity in the system remains sufficient, which is consistent with our findings from industry players. The industry’s excess liquidity amounted to RM160 bil, while BNM released an additional RM30 bil of liquidity by revising the statutory reserve requirement (better known as SRR) in a pre-emptive move last week.
RAM highlights that the easing of regulatory requirements on capital and liquidity may weaken some metrics that are crucial to our credit analysis. As our rating assessment is forward-looking in nature, a blip in credit metrics need not warrant a re-evaluation of the ratings of banks if these are restored within a reasonable timeframe to levels commensurate with their ratings and risk profiles.
Lim Yu Cheng, CFA, FRM
(603) 3385 2492
(603) 3385 2577
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