Published on 10 Dec 2021.
Malaysian banks’ 3Q 2021 net interest margins (NIMs) suffered a squeeze from the previous quarter, crimped by another round of modification losses. Much smaller in quantum compared to last year’s, the expenses were triggered by the opt-in loan moratorium introduced in early July 2021 under the government’s Pemulih fiscal package.
“Modification charges shaved roughly 8 bps off the average NIM of eight selected local banking groups in 3Q 2021 to 2.21%. Excluding these losses, NIM would still have contracted 3 bps as the bulk of term deposits had been fully repriced at lower rates by 1H 2021 and current and savings account deposit growth further lost steam. The three-month interest waiver under the Financial Management and Resilience Programme for eligible borrowers under relief in the bottom 50% (B50) income bracket poses further downside risk to NIMs but the impact is likely to be small,” says Wong Yin Ching, RAM’s co-head of Financial Institution Ratings, in conjunction with the publication of the Banking Quarterly Roundup – 3Q 2021.
Thanks to repayment assistance measures, the banking system’s gross impaired loan (GIL) ratio clocked in at a low of 1.57% as at end-October 2021 (end-December 2020: 1.56%). Based on data obtained at the recent bank results briefings, the average proportion of the eight banks’ domestic loans under relief or restructuring and rescheduling programmes more than doubled to 28% following the rollout of the Pemulih loan moratorium.
“We do not consider this an indication of a sharp and widespread deterioration in loan quality in the banking system. The surge was partly due to the more flexible eligibility criteria under which all non-impaired retail and small and medium enterprise applicants will be granted automatic approval by banks. The high proportion of assisted loans without arrears and applicants in the top 20% income bracket corroborates our view. We understand that the proportion of loans under relief peaked in September 2021 and banks have already seen markedly fewer applications in recent weeks,” adds Wong.
Despite the still benign GIL ratio, banks are proactively building up provisioning buffers in anticipation of higher defaults when forbearance measures are gradually lifted. Six of the eight banks reported more moderate loan provisioning expenses q-o-q, although the average credit cost ratio was nudged up to 55 bps in 3Q 2021 (2Q 2021: 52 bps; 2020: 84 bps) by the sizeable management overlay of a large bank. In line with our conservative assumptions, we have pencilled in a 50 bps-60 bps credit cost ratio for 2022, which is still higher than the pre-pandemic five-year average of 31 bps.
The overall profit performance in 9M 2021 rebounded from the previous corresponding period on the back of NIM recovery, lighter provisions and disciplined cost control. While we expect core profitability to be largely sustained in 2022, banks’ bottom line will be weighed down by Cukai Makmur – a one-off prosperity tax. Taxable income above RM100 mil will be taxed at a higher rate of 33%. We estimate the tax to have a roughly 10% impact on net earnings, which is deemed manageable.
RAM’s Banking Quarterly Roundup 3Q 2021 can be downloaded at www.ram.com.my.
Wong Yin Ching, CFA
(603) 3385 2555
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