RAM Ratings: Banks set aside more provisions in 1Q2020 as pre-emptive measure

Published on 09 Jul 2020.

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Domestic banks’ financial results for 1Q 2020 were underscored by heftier loan impairment charges, as they proactively increased their loss-absorption buffers amid the challenging landscape. Despite a still-benign gross impaired loan (GIL) ratio, banks are bracing against possibly higher loan delinquencies when the six-month moratorium on individual and SME loans expires at the end of September. 

“To be prudent, banks are putting aside more provisions. All eight local banking groups reported heavier y-o-y impairments in 1Q 2020. The average credit cost ratio spiked up to 62 bps from 18 bps (or 25 bps after adjusting for a one-off item) in 1Q 2019. One bank also incurred higher provisions due to a lumpy default in its Singaporean operations,” highlights Wong Yin Ching, RAM’s co-head of Financial Institution Ratings, in conjunction with the publication of the rating agency’s Banking Quarterly Roundup 1Q 2020.

The domestic banking system’s asset quality remained robust with a GIL ratio of 1.55% as at end-May 2020 (end-December 2019: 1.51%). We envisage the system’s GIL ratio to stay below 1.70% in 2020, primarily supported by the relief measures that will protect banks’ asset quality from borrowers’ short-term repayment difficulties. That said, troubled loans are expected to surface in 2021. 

Meanwhile, the eight local banking groups reported a notably lower average pre-tax ROA of 1.10% and ROE of 10.7% in 1Q 2020 (1Q 2019: 1.43% and 13.2%). With expectations of further erosion of net interest margins, elevated credit costs and  modification charges arising from non-accrual of interest (or profit) on deferred instalments of fixed-rate auto and Islamic financing under the six-month moratorium, banks’ profitability is seen to remain under pressure this year. 

Domestic loan growth kept stable at 3.9% in May 2020 (2019: 3.9%), with business loans (+4.9%) outpacing the expansion in household financing (+3.2%). This may be attributable to cash-strapped companies drawing down on their facilities to fund fixed operating overheads amid the nation-wide lockdown. On the other hand, the closure of property and auto showrooms during the lockdown coupled with downbeat consumer sentiment had resulted in a steep decline in individuals’ spending on discretionary big-ticket items. 

The loan moratorium will help slow down the normal rate of principal reduction, thus lending some support to loan growth. That said, it is not indicative of real credit demand. Notably, loan applications and approvals plummeted a respective 30.1% and 41.7% y-o-y (based on three-month moving average), with those for households contracting more sharply than businesses.  Overall, the banking industry’s loan growth is projected to taper off to 1%-2% in 2020.

RAM’s Banking Quarterly Roundup 1Q 2020 is available for download at www.ram.com.my.


Analytical contact
Wong Yin Ching, CFA
(603) 3385 2555

Media contact
Padthma Subbiah
(603) 3385 2577


About RAM Rating Services Berhad (RAM Ratings)

Established in 1990, RAM Ratings is a leading credit rating agency registered under the Securities Commission’s Guidelines on Registration of Credit Rating Agencies, 2011. In addition to the provision of credit ratings for corporate bonds and sukuk and their issuers, RAM Ratings also provides research and publications on Islamic finance, fixed income and macro-economic and industry analysis as well as data analytics relating to credit risk, counterparty assessments and other related domains. 


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Publication Date Published Category
Banking Quarterly Roundup - 1Q2020 09-Jul-2020 Banking Quarterly Roundup View PDF