Published on 04 Jun 2021.
RAM Ratings observes a noticeable recovery in the banking industry’s profitability in 1Q 2021, following a slump last year. The top five largest banking groups reported a y-o-y increase in profit before tax ranging from 13% to 114%, after adjusting for one-off items. The improvement was underpinned by a strong rebound in net interest margins (NIMs) amid lower funding costs, and to a lesser extent, lower impairment charges.
That said, the highly uncertain operating environment – as reflected by the recent imposition of a full lockdown – continues to cast a shadow over the industry’s profit outlook. An extension of the two-week lockdown and slower-than-expected rollout of the national vaccination programme will heighten downside risks through heftier provisioning needs and weaker credit demand.
“The average NIM of our eight selected local banking groups rebounded 14 bps y-o-y to an annualised 2.31% in 1Q 2021. This was driven by the gradual repricing of fixed deposits amid the aggregate 125 bps cut in the overnight policy rate (OPR) last year and rising proportions of low-cost current and savings account deposits. Barring further OPR cuts, their NIM for the full year should be 15-20 bps higher than 2020’s given reduced funding costs and the absence of sizeable modification losses (incurred in 2Q 2020),” 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 2021.
The banking sector’s loan growth picked up to 3.9% in March 2021 (December 2020: 3.4%), fuelled by resilient household lending even though business loan growth remained anaemic. Full-year credit expansion is projected to moderate to about 3%. The less optimistic forecast is premised on the prevailing uncertainties and still challenging climate. While the extension of the Home Ownership Campaign and vehicle sales tax waiver until end-2021 will support credit demand, borrowers’ cautious appetite may restrict big-ticket expenditure.
Masked by ongoing loan relief measures, the system’s gross impaired loan ratio kept stable at 1.58% as at end-March 2021 (end-December 2020: 1.56%). Loan repayment assistance as well as restructuring and rescheduling (R&R) are still readily available for all troubled borrowers. As part of the recently announced Pemerkasa Plus stimulus package, the Government has also reintroduced the automatic approval for applications from those who have lost their jobs, B40 individuals and affected SMEs to obtain a three-month payment holiday or 50% reduced instalments for six months.
Based on the latest available data, about 13% of the eight selected local banks’ domestic loan portfolios were under relief or R&R. We expect the proportion to trend upwards given the tighter movement restrictions’ likely adverse impact on businesses and employment. The underlying asset quality will become clearer once forbearance measures are lifted, with impaired loans likely to only peak in 2022.
RAM’s Banking Quarterly Roundup 1Q 2021 can be downloaded at www.ram.com.my.
Wong Yin Ching, CFA
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