PETALING JAYA: Lending by banks has stabilised following the reopening of the economy and the banking system’s loan growth has remained steady in August at 4.4% year-on-year (y-o-y).
By segment, household loan growth inched up to 4.8% y-o-y, driven by higher auto loans due to the sales and services tax exemption from June 15 to Dec 21. As for loan approval, the rate improved to 43% from 39% in July, but this came on the back of lower loan applications.
However, the growth could taper off going by some leading indicators that have remained weak, said analysts.
Business sentiment, for one, is still feeble with loan growth declining to 3.7% y-o-y in August, from the 4.7% y-o-y growth achieved in July as working capital loan growth weakened.
While the approval rate has risen, loan approval remains weak, contracting 14.2% y-o-y in that month.
Apart from auto loans, loan approvals in all other major loan segments also fell in tandem with a contraction in loan applications, pointed out UOB Kay Hian (UOBKH) in a report. The research firm foresees system loan growth falling to 3% by end-2020 from 2019’s 3.9%. TA Research is less bullish, keeping its loan growth forecast at 2.5% for 2020.
A key concern in the banking sector is the worry whether borrowers – be they individuals or corporates – can repay their loans now that the automatic loan moratorium has ended.
“Notwithstanding some green shoots of recovery that are beginning to appear in select sectors, asset quality is a key concern. This is because banks are still unable to accurately estimate the level of provisions required post the six-month loan moratorium, ” said one analyst.
For this reason, most analysts have not rushed in to upgrade their “neutral” call on the sector, which is trading at an undemanding 0.80 times (x) 2021 forward price to book (P/B).
UOBKH said that given the unprecedented impact on the economy, provisions are likely to remain elevated going into 2021.
“As such, even as the market is trying to price in a 2021 recovery, we note that the sector’s return on equity (ROE) of 7.5%-7.5% (consensus: 8.0%) in 2021 remains well below pre-Covid-19 levels of 9%-10% when sector valuations were hovering at 1.0-1.1x P/B, ” it said in a report yesterday.
During the loan moratorium, consumers and small and medium-sized enterprises had their credit positions frozen and August’s gross impaired loans (GIL) ratio, which improved to 1.40% (from 1.43% in July) did not fully reflect the potential Covid-19 induced asset quality stress, said UOBKH.
Similar to other research firms, UOBKH expects a pick-up in the GIL ratio after September. But the numbers should remain generally benign until end-2020 due to the targeted loan moratorium exercise for the next three months, it added.
It expects banks to continue front-loading provisions where it is forecasting “a tripling in system net credit cost in 2020 and for it to remain elevated in 2021”.
It also expects deposits, which grew at a commendable 4.5% y-o-y in August, to taper off after September.
That said, some analysts do not foresee “exacerbated stress to the banking sector as it faces the current headwinds on a position of strength”.
Malaysian banks’ earnings had declined significantly in 2Q 2020, dragged down by hefty modification losses and pre-emptive provisions as well as markedly thinner net interest margins (NIMs). RAM Ratings in a recent report said the average pre-tax return on assets and return on equity of eight selected local banks fell to an annualised 0.7% and 6.8%, respectively, in the same period.
It added that while earnings should improve in 3Q20 and 4Q20, banks’ profit performance is likely to remain subdued for the rest of the year.
However, the targeted extension of the loan moratorium beyond September for selected borrowers will trigger another round of modification losses, although to a much smaller degree, the rating agency said.
It noted that the average credit cost ratio of the eight banks soared to 91 basis points (annualised) in 2Q20 versus 1Q20’s 62 bps and 2019’s 27 bps and is likely to remain elevated in the second half of the year.
“Switching to banking stocks is not so straight-forward given the uncertainty surrounding the extent of the jump in credit costs after September and the end of the case-by-case repayment assistance programme on Dec 31, ” said another banking analyst.
He noted that sentiment towards banks has also been hurt by the deferment of the interim dividend by most banks during the April-June quarterly results.
At its current valuations, the sector is trading only slightly below the Global Financial Crisis low of 0.95x.
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