New Bank Negara guidelines seen weighing on earnings

PETALING JAYA: The recent Bank Negara revised guidelines on restructured and rescheduled (R&R) loans could hit the asset quality of banks and impact its earnings this year amid the compression in net interest margins, slower loan growth and softer capital market activities in the banking sector.

Under the guidelines, new R&R loans effective April 1 in the Central Credit Reference Information System (CCRIS) would be classified as impaired. CCRIS is used by banks as part of their assessment of borrowers’ creditworthiness.

A R&R facility is where a modification has been made to the original repayment terms and conditions of the loan following an increase in the credit risk of a customer.

Analysts and industry observers said with the guidelines on board it could result in higher impaired loans and weigh on the earnings of banks due to higher provisions that need to be set aside for impaired loans under this guidelines.

RAM Ratings co-head of financial institution ratings Sophia Lee told StarBiz she expected to see an uptick in the industry’s gross impaired loan (GIL) ratio this year following the implementation of this guideline.

The new requirement only applies to loans that are rescheduled and restructured on or after April 1 2015, and not retrospectively.

Despite this guidelines, she said Malaysian banks were in a sound position even after considering this potential uptick in the GIL ratio and the rating agency would maintain its stable outlook view on the banking industry.

The banking industry’s latest GIL ratio stood at a low 1.6% as at end-March (2015) compared with 1.7% month-on-month in February and January (2015).

The banking system continues to be well-capitalised with common-equity tier-1 capital ratio standing strong at 12.6% while the system’s tier-1 and total capital ratios remained favourable at 13.3% and 15.3%.

“We envisage that banks which are more stringent in classifying R&R loans as impaired will be less affected.

“The new guideline will discourage the ‘evergreening’ of loans as banks will have to set aside provisions once these loans are classified as impaired, which would in turn affect their profit performance.

“Based on our estimates, a significant portion of current R&R loans are retail-based and mainly in the form of home mortgages and credit cards.

“Based on RAM’s rated portfolio, most banks have a low proportion of R&R loans - less than 3% of their total financing. Currently, banks’ non-impaired R&R loans ranges from 50% to 80% of their total R&R portfolio,’’ Lee noted.

The rating agency envisage R&R loans to be further reduced with this guideline, as there is less incentive to restructure or reschedule non-impaired loans.

There are some exceptions to the R&R loans where it would not be classified as impaired loans.

This is where, for example, where a moratorium on loan repayments is granted under specific and exceptional circumstances, such as when the customer is affected by natural disasters.

However, the moratorium shall be for a period of not more than six months from the date of the customer’s application (for the moratorium).

Secondly, where the loan is rescheduled or restructured by Agensi Kaunseling dan Pengurusan Kredit (AKPK) and lastly for retail loans, where a banking institution elects not to increase the instalment amount following an increase in the base rate/base lending rate in cases where the increase is less than RM50 per month.

Impaired R&R facilities can be reclassified back to non-impaired loans by a bank when the borrowers have continuously service their repayments after R&R for at least six months or a later period as may be determined by the bank’s policy.

MIDF Research analyst Kelvin Ong agrees the revised guidelines would result in upticks in impaired loan ratios of banks in the near term and on the whole expect the changes to be slightly negative on banks’ earnings.

At the same time, he said the research house does not expect the impact to banks’ capital position from the revised guidelines to be significant.

Ong, who is maintaining his Neutral stance on the sector, added the classification of R&R as impaired loans was likely to result in banks’ loan loss coverage (LLC) ratios to decline.

For banks like AMMB, Public Bank, Hong Leong Bank and BIMB which have LLC ratios of well above 100%, these banks are in a more comfortable position in terms of loan loss coverage, he opined.

OCBC Bank (M) Bhd country chief risk officer Jeroen Thijs said the bank’s policy has always been to immediately downgrade R&R accounts to impaired and only reclassify to performing if and when a customer continuously service his repayments for at least six months.

As such the new guidelines would not lead to an increase in non performing loans (NPLs) for OCBC Bank, he noted.

The revised guidelines would therefore not impact capital or capital ratios as the bank is already following the methodology as per the new guidelines, Thijs added.

Banks that used to classify accounts as NPLs after 180 days or did not immediately downgrade R&R accounts to NPL would be the most impacted, he noted.

Maybank IB Research analyst Desmond Ch’ng said banks would now have to be more vigilant towards asset quality in view of the prospect of rising impaired loans with the inclusion of R&R loans, and thus the risk of having to set aside higher provision levels.

“Even if no additional provisions are made against R&R loans, there will be a slight negative impact to a bank’s capital ratios, with the exclusion of collective allowances on such loans from Tier 2 capital computations.

“Banks will now have to pass through higher interest rates to consumers. In the past when the policy rate was raised, not all banks correspondingly raised borrowers’ monthly instalments.

“With this new guideline, if the increase in monthly instalment stemming from a policy rate increase is more than RMR50 and the instalment is not raised, the loan may have to be treated as a R&R loan and impaired,’’ he said in a research note.

Ch’ng said Public Bank appeared to have moved ahead of its peers and has already started classifying performing R&R loans as impaired, adding that even so, the bank would still have to tighten its classification criteria because the central bank’s guideline calls for an observed repayment period of six months (not three months) before a R&R loan could be reclassified as non-impaired.

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