Published on 03 Sep 2020.
Malaysian banks’ earnings declined significantly in 2Q 2020, dragged down by hefty modification losses and pre-emptive provisions as well as markedly thinner net interest margins (NIMs). The average pre-tax return on assets and return on equity of eight selected local banks fell to an annualised 0.7% and 6.8%, respectively, in the same period (1Q 2020: 1.10% and 10.7%). While earnings should improve in 3Q 2020 and 4Q 2020, banks’ profit performance is likely to remain subdued through the rest of the year amid the economic downturn and highly uncertain operating landscape.
“Banks’ NIMs were severely crimped by the aggregate 75 bps cut in the overnight policy rate (OPR) in 2Q 2020, which was compounded by 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. Although we expect some respite in NIM as deposits are progressively repriced at lower rates, the 25 bps OPR reduction in July along with the likelihood of more cuts on the horizon, will limit the extent of this recovery. The recently announced targeted extension of the loan moratorium beyond September for selected borrowers will also trigger another round of modification losses, although to a much smaller degree,” highlights Wong Yin Ching, RAM’s co-head of Financial Institution Ratings, in conjunction with the publication of the Banking Quarterly Roundup – 2Q 2020.
With a large proportion of loans on payment holiday, the banking system’s gross impaired loan (GIL) ratio clocked in at an all-time low of 1.43% as at end-July 2020 (end-Dec 2019: 1.53%). The true underlying asset quality will only become apparent after the expiry of COVID-19 loan relief measures. Despite the still benign GIL ratio, banks have been proactively building up their provisions in anticipation of heightened defaults next year. The average credit cost ratio of the eight selected banks soared to 91 bps (annualised) in 2Q 2020 (1Q 2020: 62 bps; 2019: 27 bps) and is likely to remain elevated in the second half of the year.
The industry recorded a 4.5% y-o-y loan growth in July 2020 (2019: 3.9%), underscored by the automatic six-month moratorium on individual and SME loan repayments as well as various government funding programmes. After having shrunk in April and May amid the earlier stages of the lockdown, loan applications and approvals rebounded strongly in the next two months, mainly fuelled by the household segment. That said, it remains to be seen if this trend is sustainable given still feeble consumer and business sentiment. Overall, we expect credit expansion to come in at 3%-4% in 2020.
RAM’s Banking Quarterly Roundup 2Q 2020 is available for download at www.ram.com.my.
Wong Yin Ching, CFA
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