Banks demonstrate resilient credit portfolios, S&P Ratings says

S&P Ratings said local banks built up their provisioning buffer in the first three quarters of 2020 amid a sharp economic contraction following the Covid-19 outbreak.

KUALA LUMPUR: Malaysian banks are demonstrating resilient credit portfolios as they transition out of the blanket six-month moratorium in the country, S&P Global Ratings said.

It said in a statement on Tuesday that however, the underlying strength of affected borrowers remains to be seen and the initial recovery of repayments could prove fragile.

“In our view, third-quarter earnings of major Malaysian banks show early indications that banks are exercising caution as they transition out of the six-month moratorium that ended on Sept 31,2020.

“This blanket moratorium was a debt repayment relief for all retail as well as small and midsize enterprise (SME) customers, which froze account downgrades and formation of nonperforming loans for more than 70% of local banks' loan books, ” it said.

S&P Ratings said repayment rates for major banks' retail and SME portfolio significantly improved since October, based on third-quarter disclosures.

On average, the proportion of the loan book that requires further repayment assistance has dropped to 8%-13% for major Malaysian banks that it rates, from 70%-80% in the initial phase of the blanket moratorium.

“However, the industry only has repayment data for one month, and we believe a longer period of observation is needed to confirm the underlying resilience of affected portfolios.

“We believe the continuous prudence of Malaysian banks in proactive provisioning will help further contain downside credit risks, ” it said.

S&P Ratings said local banks built up their provisioning buffer in the first three quarters of 2020 amid a sharp economic contraction following the Covid-19 outbreak.

It also noted that credit costs for eight local banking groups increased by more than 200% year on year to RM10bil over the first three quarters of 2020, while the industry's gross impaired loan ratio remained at 1.4%-1.5% during the blanket moratorium.

“We expect the Malaysian banking industry's gross impaired loan ratio to reach 3.9%-4.0% by end-2021, and maintain our forecast of 130 basis points (bps) for cumulative credit costs (annual provisions as a percentage of gross loans) over 2020 and 2021, ” it said.

The rating agency said it would continue to monitor macroeconomic and job market conditions in the next few months.

It also maintained its forecast of 15-20 bps in net interest margin compression this year, and believe sector-wide return on assets could drop to 1.0%-1.2% in the next 12-24 months, from 1.5% in 2019.

In S&P Ratings' view, the additional three-month moratorium offered to all B40 (bottom-40% income earners) and SME borrowers will only marginally affect Malaysian banks' asset quality, given that B40s make up only 10%-20% of loan books.

“We estimate 25%-40% of local banks' gross loans are eligible for this relief, significantly lower than 70%-80% of loans under the first moratorium.

“We expect more eligible borrowers to opt out of this moratorium, given that the deferral implies higher financing costs eventually. As a result, the final coverage of the additional three-month moratorium could be notably lower than 25% of banks' loan books, ” it said.

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