New wave of Covid cases set to hit the banks

With the recent spike in Covid-19 cases stoking concerns of some form of lockdown, analysts foresee a rise in applications under the three-month targeted loan repayment assistance, which began on Oct 1.

PETALING JAYA: The rising number of new Covid-19 cases is likely to lead to more borrowers – hit by movement restrictions – seeking loan moratorium extensions, as businesses are disrupted with further job and pay cuts.

This will continue to cloud the outlook for the banking sector, which posted a negative return of 5.5% in the third quarter, lagging behind the FBM KLCI’s flat return for the same period.

According to Kenanga Research, in August, 10%-15% of loans could require some assistance after the six-month loan moratorium ended on Sept 30, with CIMB Group Holdings Bhd having the highest proportion at 20% to 30%.

Up to mid-September, the research firm has learnt from banks that the take-up rates for further aid have been lower than expected – at a single-digit percentage of loans.

However, with the recent spike in Covid-19 cases stoking concerns of some form of lockdown, analysts foresee a rise in applications under the three-month targeted loan repayment assistance, which began on Oct 1.

“If new cases continue to rise, this could lead to further increase in the take-up rate for moratorium extensions among borrowers, which will cast an overhang on the banking sector, ” said UOB Kay Hian (UOBKH) in a report.

According to UOBKH, retail-centric banks like Public Bank Bhd and Hong Leong Bank Bhd showed preliminary indications of low moratorium extension take-up rate of 1% and 4% respectively.

On the other hand, corporate-centric banks like CIMB, RHB Bank Bhd and Malayan Banking Bhd (Maybank) are likely to show higher take-up rates, it said.

Kenanga Research expected banks to continue booking in pre-emptive provisions and build up loan loss reserves. It added that a better picture would emerge in the coming months as to how significant the asset quality deterioration would be.

“Fundamentally, we think revenue-led headwinds have eased, given that the bulk of the modification losses and overnight policy rate (OPR) cuts have been absorbed in the first half of 2020. However, the automatic loan moratorium, targeted loan assistance and various SME lending programmes provide band-aids that mask the true impact of the economic downturn on asset quality while giving banks time to build up loan loss reserves.

The research firm maintains its “neutral” call on the sector because asset quality will be the key swing factor to earnings.

“Our estimates suggest that the banks will need to look beyond 2021 before net profit can recover to 2019 levels, ” it said.

For 2020, it forecast sector net profit to fall by 26% year-on-year (y-o-y) followed by a recovery of 18% y-o-y in 2021.

In its models, it has assumed that Maybank and CIMB would resume with their dividend reinvestment plan to preserve capital.

Hence, the research firm’s 2020 estimated sector earnings per share stands with a sharper contraction of 29% followed by a 16% y-o-y recovery in 2021.

Similarly, banks in Asia-Pacific (Apac) are also bracing for sharp drops in income as the Covid-19 pandemic bites.

Moody’s Investors Service, in a report yesterday, estimated that pre-provision income for Apac banks would decline 5% to 10% in 2020 from 2019 due to falls in interest rates across Apac economies and a flattening of yield curves.

As a result, banks’ profitability, as measured by return on tangible assets would deteriorate significantly across Apac in the coming years, it added.

“Based on our financial and econometric models, we project that problem loans (NPLs) will double on average across the 14 Apac economies by 2022. Banks in India and Thailand will see the largest increases in NPLs due to the greater severity of economic shocks to their economies and the historically poor performance of certain loan types, the rating agency noted.

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