IT’S liquidity that is keeping the stock markets afloat. Not the real economy.
No amount of bad news – from rising unemployment to supply chain disruptions and rising tensions between the US and China – has had any impact on the stock market so far. Usually, in the month of May, fund managers sell off their positions and go for their summer break.
But it is not happening this year. Last week, trading volumes on Bursa Malaysia hit a record high of more than nine billion shares, buoyed by retail participation. Foreign investors, who usually would be the ones responsible for raising the tempo on Bursa, were net sellers.
All the major stock market indexes in the US have been rising, indicating a quick recovery from the Covid-19 pandemic. Dow Jones is testing the 25,000 levels and has come a long way from the low of 18,591 points in March. The highest close is 29,551 points. Technology-heavy Nasdaq, which is at 9,212 points, is closer to going back to its previous highest close of 9,817 points.
Bursa is still some way from its high of 1,895 points. Volume is high due to many active traders who generally do not take a long-term view. The reason is because the underlying economy is weak.
One only needs to scrutinise the results of banks to understand how bad the next few months would be before things improve. Banks are concerned on the impact to their bottom line, especially after September when people have to start servicing their loans again after a six-month moratorium.
Maybank, the largest financial institution in the country and ranked fourth by assets in the region, was the first to announce its results. The topline numbers were higher. Closer scrutiny reveals the provisioning set aside for bad loans moved up significantly.
The group’s provisions for impairments on loans and other debts went up by RM357.7mil, or 59%, to RM961.7mil as compared to the corresponding period in 2019. This is only for the first quarter when the country was going through the early stages of Covid-19 pandemic.
The provisioning in the first quarter has not taken into account the full brunt of the amount that Maybank has to set aside for absorbing the cost of accrued interest from the moratorium on hire purchase and personal loans. The full impact will come only in the next quarter.
As rightly put by Maybank president and group chief executive Datuk Farid Abdul Farid Alias, the first quarter results were not representative of the way the bank will perform for the rest of the year. He expects the operating environment to be difficult.
Public Bank, which is known for its prudence, was the second to financial institution to release it results. The bank, which commands the highest valuations among its peers, normally is the first financial institution to announce its results and it is almost always a set of good numbers.
This time around, it registered a decline of 5.7% in its net profit to RM1.3bil compared with the first quarter of last year. Public Bank attributed the drop in bottom line to the declining interest rates.
The amount Public Bank set aside for provisioning of doubtful loans was higher – by RM64.6mil – as compared to the same period in 2019 due to allowances made in anticipation of Covid-19 pandemic.
CIMB Group Bhd registered a 55% drop in its first quarter profit before tax to RM714mil. It set aside RM967.6mil in expected credit loss, which is significantly higher than the RM300mil provided for in 2019.
Like Maybank and Public Bank, CIMB also expects operating conditions to be challenging and an increase in provisions for loans to businesses.
The question to weigh is how long would the various stimulus packages be able to support stock markets against the poor state of the real economy due to the Covid-19 pandemic?
The liquidity gush that is keeping markets afloat stems from the stimulus package led by the US. The US initiated a US$2 trillion (RM8.73 trillion) stimulus package with more to come. Federal Reserve chairman Jerome Powell had said that they have more fire-power to help keep the economy afloat, if it needs to.
The governments of UK and Japan share similar sentiments.
Nearer home, Malaysia has a RM260bil stimulus package anchored by an automatic six-month moratorium on all loans and financing obligations for individuals as well as small and medium enterprises (SMEs). Malaysia is not alone in allowing for the deferment.
Singapore rolled out a S$63.7bil (RM195.3bil) package to support businesses to help them in their cashflow and credit lines. The package offered individuals and SMEs an option for moratorium on payment of loans.
Thailand and Indonesia did not offer any moratorium on loans. However, both countries announced measures such as tax cuts to help businesses. Indonesia’s package also went towards assisting the poor and lower income groups.
While governments can keep coming up with more stimulus packages, the real driver to the economy is activity at the ground level. Towards this end, banks play a crucial role in providing financing to businesses to keep transactions moving.
It is a given that banks will make less profit in times of troubles. Worst, most people and government officials expect them to make less money and show more compassion during the Covid-19 pandemic.
But the bottom line of banks coming under pressure is not good for any economy. There will be a knock-on effect in the real economy.
Banks will have their hands full to ensure that their existing portfolio of customers keep servicing their loans after the six-month moratorium ends in August. The tendency is to prioritise their lending activities to only the good customers.
Customers who do not have a good track record in repaying loans will be the last to get additional lines of credit. Even good customers with sound businesses may not get all the financial assistance they expect.
Banks cannot be faulted for being cautious. The weak economic landscape going forward only accentuates their view that the quality of assets in their portfolio will get worse when the moratorium ends.
In recognising the difficult path ahead, Maybank in its notes to the first quarter results, stated that it was re-evaluating its target of a return on equity of between 10% and 11%. The bank effectively is telling its shareholders that the returns will be lower this year.
If the earnings of banks, which is the barometer of the economy, is under threat, certainly the stock market cannot be roaring for long.
The views expressed here are the writer’s own.
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