Asset quality concerns weigh on banks


With the rising number of coronavirus cases and the continued conditional movement control order (CMCO), concerns remain on repayment of loans and whether banks have made enough provisions to absorb any (loan) losses that may unfold due to the pandemic.

PETALING JAYA: Banking stocks, which rallied recently following positive news on Covid-19 vaccines and waning interest in glove makers, came under selling pressure yesterday.

With the rising number of coronavirus cases and the continued conditional movement control order (CMCO), concerns remain on repayment of loans and whether banks have made enough provisions to absorb any (loan) losses that may unfold due to the pandemic.

“A resurgence of Covid-19 cases could cast a pall on the outlook, considering that another drop-off in economic activity could result in more business failures and loan deterioration, ” Kenanga Research analyst Ahmad Ramzani Ramli told StarBiz.

He said that while banks have front-loaded their provisioning after the outbreak of Covid-19, the question of adequate provisioning is still on the cards from the likelihood of further coronavirus-related restrictions due rising infections.

“Risks on asset quality still linger and will likely be the key swing factor to earnings ahead, ” he added.

Globally, Fitch Ratings said the outlook has turned negative for banks in most jurisdictions this year compared to 2020 as it expects “asset-quality risks to crystallise in 2021 as government support measures for economies and borrowers are unwound, while an extended period of low interest rates will affect profitability”.

Where Malaysian banks are concerned, Fitch Ratings said while the rating outlook for local banks was “negative”, the sector outlook was “stable”.Where Malaysian banks are concerned, Fitch Ratings said while the rating outlook for local banks was “negative”, the sector outlook was “stable”.

In its “2021 Global Banks’ Outlook Compendium”, the rating agency said this reflects downside risks to its baseline scenario from a potentially sluggish economic recovery following sharp deterioration in 2020 owing to the pandemic.

It said the negative rating outlooks reflect pressure on sovereign support-driven ratings and this pressure could increase if the economic downturn is more prolonged than expected.

Where Malaysian banks are concerned, Fitch Ratings said while the rating outlook for local banks was “negative”, the sector outlook was “stable”.

Key issues for local banks, it added, were slow non-performing loan recognition, lower profitability and property market risks.

Kenanga’s Ahmad Ramzani said fundamentally, the industry has yet to see improvement with asset quality and elevated impairments remaining key concerns.

“Going into the end of November 2020, take-up rates for the targeted repayment assistance (TRA) were quite muted, but the banks do not discount uptick ahead depending on the impact of the current CMCO, ” he said in a report yesterday.

According to the research firm, post-third quarter 2020 results, banks had reported assistance within their guidance of 10%-15%. As for exposure to the B40 group, it was relatively minimal with most banks reporting in the low teens of their loan books.

“We noted further that some banks raised their credit cost guidance during the last reporting quarter, citing management overlays, macro-economic overlays and early signs of repayment slippage.

“We, however, do not discount further overlays ahead due to concerns of repayment given the prolonged CMCO, ” it said.

On a more positive note, the aggressive pre-emptive provisioning by the banks will give a much more optimistic credit costs level for 2021, it added.

While loans saw a slight uptick quarter-on-quarter in the last reporting period following the reopening of the economy, he said “most banks maintain their guidance for 2020, but remain uncertain for 2021 as they are still cautious on their outlook/targets ahead, given concerns of further MCOs as the effectiveness and logistics of the vaccines.

The research firm said banks’ net interest margin (NIM) is expected to improve ahead in the absence of further interest rate cuts and noted that there have been not many revisions in consensus earnings forecast and hence is likely to have bottomed out.

“We foresee sector net profit rebounding by around 18% year-on-year following NIM expansion and the easing of credit cost.

“The sector’s return on equity is expected to improve to about 8%, but still short of the double-digit levels that the sector had consistently posted over the years.”

At the close yesterday, shares of Malayan Banking Bhd fell seven sen to RM8.24; CIMB Group Holdings Bhd was down 14 sen to RM4.16; and Public Bank Bank and Hong Leong Bank Bhd shed 28 sen and 26 sen to RM20.34 and RM17.84, respectively.

AMMB Holdings Bhd slipped six sen to RM3.38, while RHB Bank Bhd closed unchanged at RM5.48.

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