Banks can withstand rise of impaired loans


Out of the eight banks in CGS-CIMB’s coverage, Public Bank Bhd and Hong Leong Bank Bhd came out tops through five indicators to assess the banks’ defensiveness against credit risks - the peak GIL ratio in the past 20 years, collateral coverage, loan loss coverage, total buffer coverage and the percentage of loan exposure to residential mortgages.

PETALING JAYA: Concerns of a potential spike in banks’ gross impaired loans (GIL) still linger in the market, especially since the targeted repayment assistance will expire in June next year.

CGS-CIMB Research said while the banking industry’s GIL ratio was expected to rise, the loan loss provisioning was expected to drop as banks have front-loaded most of their loan loss provisioning in 2020.

The research house projected that the GIL ratio will rise to 1.7% at end-December 2020 and 2% at the end of December 2021, from 1.38% as of September 2020.

“Banks’ proactive moves to ramp up pre-emptive provisioning have pushed up the industry’s loan loss coverage from 80.9% at end-December 2019 to 105.2% at end-September 2020, an all-time high.

“Our analysis shows that Malaysian banks have collateral and provision coverage robust enough to withstand a spike in their GILs.

“Based on our calculation, the average collateral coverage for the Malaysian banks under our coverage is high at 79.3% for FY21 to FY22F while the loan loss coverage including the regulatory reserve stood at a comfortable level of 119.1% at end-June 2020, ” it said in a sector note yesterday.

It added that the provision buffers could cover up to 80.5% of a rise in GIL from the end-June 2020 level which gave it the comfort to retain its “overweight” rating on banks despite the expected rise in GIL next year.

Out of the eight banks in CGS-CIMB’s coverage, Public Bank Bhd and Hong Leong Bank Bhd came out tops through five indicators to assess the banks’ defensiveness against credit risks - the peak GIL ratio in the past 20 years, collateral coverage, loan loss coverage, total buffer coverage and the percentage of loan exposure to residential mortgages.

The research house also ran stress tests on the banks’ FY21F net profits, which found that the impact would be the smallest for Public Bank, Hong Leong Bank and BIMB Holdings Bhd as the provision buffer of these banks were able to cover the additional provisioning from the doubling of their GIL ratios.

CGS-CIMB added that including regulatory reserves, the loan loss coverage for all banks would be more than 90%, not far off from the full coverage of 100%, which reflected the strong provisioning buffers for Malaysian banks. In terms of loan segments, the research house said residential mortgages carried the lowest credit risks as they were fully secured against properties and the loan-to-value ratios for new residential mortgages range from 70% to 90%.

Hong Leong Bank has the highest exposure to residential mortgages at 51.6% of its total loans in FY21F, followed by Public Bank at 40.1% due to their focus on the consumer loan segment.

CGS-CIMB advised investors to take positions in Malaysian banks that were most defensive against the credit risks arising from the Covid-19 pandemic.

“From our analysis in this report, we conclude that the FY21F net profits of Public Bank and Hong Leong Bank would be the least impacted among their peers by a potential hike in the industry’s gross impaired loan ratio in 2021F.

“For this reason, Public Bank and Hong Leong Bank are our top picks among Malaysian banks, ” it said.

Its other ratings include “add” calls on RHB Bank Bhd and AMMB Holdings Bhd, “hold” on Malayan Banking Bhd” and “reduce” calls on Alliance Bank Malaysia Bhd, Affin Bank Bhd and BIMB Holdings Bhd.

All bank stocks saw a correction yesterday on heavy profit-taking following a strong rebound over the past week on the optimism of an effective vaccine.

Top decliners in the industry yesterday were Hong Leong Bank, down 98 sen or 5.51% at RM16.80 and Public Bank, down 68 sen or 3.57% at RM18.38.

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