RAM Ratings: Relief measures delay recognition of problem loans

Published on 08 Sep 2021.

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RAM Ratings expects the emergence of bad loans in the banking system to be delayed in view of the sizeable proportion of loans under relief. With the reintroduction of the six-month blanket loan repayment moratorium for all retail, microenterprise and affected small and medium enterprise borrowers, impaired loans will continue to be suppressed for the rest of the year and even in 1H 2022. 

The latest regulatory support measure – on an opt-in basis but automatically approved – came into effect in July following a rise in infections and stricter lockdowns which resulted in major disruptions to business activity. Targeted relief programmes offered by banks were already available prior to this. Based on data obtained during the recent bank results briefings, the average proportion of domestic loans under relief or restructuring and rescheduling programmes doubled to about 26% (ranging from 22% to 32% for individual banks) from the previous quarter for eight selected banking groups. This figure may creep up in the coming months although we understand the number of applications has already slowed in recent weeks. 

“Not all relief loans will turn problematic as we believe some borrowers took the payment holiday as a precaution. This is evident from the high percentage of relief loans with no arrears or held by the T20 income group, as shared by some banks,” said Wong Yin Ching, RAM’s co-head of Financial Institution Ratings, in conjunction with the publication of the rating agency’s Banking Quarterly Roundup 2Q 2021. “The system’s underlying asset quality however will only become clearer after forbearance measures are phased out, with bad loans likely to peak in late 2022 or early 2023. As at end-July 2021, the banking industry’s gross impaired loan ratio stood at a still-low 1.67%,” she added.

We also note that all eight banks posted a higher y-o-y pre-tax profit in 2Q 2021, largely due to a low base effect, but performance was mixed on a q-o-q basis. Results for the previous corresponding period were marred by a sharp squeeze in net interest margins (NIMs) because of substantial modification charges arising from the first loan moratorium and multiple policy rate cuts. NIMs have since staged a strong recovery (2Q 2021: 2.33%; 2Q 2020: 1.83%), but the q-o-q improvement was modest (+2 bps) as most deposits had already been repriced lower by 1Q 2021. The system’s NIM is envisaged to hover at the current level in the coming quarters and may even see slight compression. We expect banks to book some modification losses in 3Q 2021 on account of the recent moratorium, but the quantum will be significantly lower than last year’s. 

“In 2Q 2021, the average credit cost ratio (annualised) of the eight banks moderated q-o-q to 52 bps from 61 bps. We however maintain our full-year projection of 60 bps-70 bps (2020: 84 bps) as we anticipate that banks will continue or even step up efforts to build up provision reserves as the protracted lockdown has dampened nascent economic recovery. Despite heightened uncertainties, profit performance for the full year is expected to be better than the previous year’s, driven by NIM recovery and to a lesser extent, lower provisioning charges,” Wong added. 

RAM’s Banking Quarterly Roundup 2Q 2021 can be downloaded at www.ram.com.my.

 

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