RAM Ratings: Hefty provisions and margin compression dented banks’ profitability in 2020

Published on 11 Mar 2021.

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Malaysian banks’ earnings slumped in 2020, dented by sizeable pre-emptive provisions and thinner net interest margins (NIMs). While earnings are envisaged to improve in 2021 with NIM recovery, banks’ profit performance is likely to remain pressured by still lofty, albeit lower, impairment charges.

“With an estimated 13% of banks’ loans under targeted repayment assistance or subject to restructuring and rescheduling, their true underlying asset quality has yet to surface. Banks bolstered their loss absorption buffers in 2020 by proactively setting aside provisions, in anticipation of higher delinquencies when the various forbearance measures are eventually lifted. The average credit cost ratio of eight selected local banks had almost tripled from 30 bps to 84 bps y-o-y. Roughly half of the charges comprised management overlays and macroeconomic adjustments. The elevated provisioning expenses last year were also exacerbated by several lumpy overseas impairments in the books of a couple of the banks,” 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 4Q 2020.

In addition, banks’ NIMs had been severely constricted by the aggregate 125 bp cut in the overnight policy rate last year, further compounded by modification charges in 2Q 2020. After having plunged to a low of 1.83% in 2Q 2020, the average NIM of the eight banks rebounded strongly in the subsequent two quarters. This was underpinned by the absence of sizeable modification losses and the gradual repricing of deposits. Nonetheless, their NIM of 2.14% (adjusted for modification expenses) for the full year stayed below the trend average of 2.20%-2.30% for the last five years. 

Although more robust bond trading income and disciplined cost management provided some respite, the eight banks reported a significantly weaker pre-tax return on assets of 0.92% and return on equity of 8.7% in 2020 (2019: 1.36% and 13.2%). Their earnings should improve in 2021, with an upward bias in NIM trajectory. However, their profit performance will likely remain clouded by the uncertain operating landscape. 

RAM’s Banking Quarterly Roundup 4Q 2020 can be downloaded at www.ram.com.my.

 

Analytical contact
Wong Yin Ching, CFA
(603) 3385 2555
yinching@ram.com.my

Media contact
Padthma Subbiah
(603) 3385 2577
padthma@ram.com.my

 

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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