Banks’ earnings to improve in 2021 amid uncertainties


On the 4Q results, Wong Yin Ching, RAM’s co-head of financial institution ratings said with an estimated 13% of banks’ loans under targeted repayment assistance or subject to restructuring and rescheduling, their true underlying asset quality has yet to surface.

KUALA LUMPUR: Malaysian banks’ earnings, which slumped last year due to sizeable pre-emptive provisions, should improve this year but their profit performance will likely remain clouded, RAM Ratings said.

In the rating agency’s Banking Quarterly Roundup 4Q 2020 issued on Thursday, it expected an improvement in earnings with an upward bias in the net interest margins (NIM) trajectory.

However, RAM Ratings pointed out the uncertain operating landscape could weigh on the earnings performance.

On the 4Q results, Wong Yin Ching, RAM’s co-head of financial institution ratings said with an estimated 13% of banks’ loans under targeted repayment assistance or subject to restructuring and rescheduling, their true underlying asset quality has yet to surface.

“Banks bolstered their loss absorption buffers in 2020 by proactively setting aside provisions, in anticipation of higher delinquencies when the various forbearance measures are eventually lifted.

“The average credit cost ratio of eight selected local banks had almost tripled from 30 bps to 84 bps y-o-y. Roughly half of the charges comprised management overlays and macroeconomic adjustments.

“The elevated provisioning expenses last year were also exacerbated by several lumpy overseas impairments in the books of a couple of the banks, ” Wong said.

She also pointed out banks’ NIMs had been severely constricted by the aggregate 125 bp cut in the Overnight Policy Rate last year, further compounded by modification charges in 2Q 2020.

After having plunged to a low of 1.83% in 2Q 2020, the average NIM of the eight banks rebounded strongly in the subsequent two quarters. This was underpinned by the absence of sizeable modification losses and the gradual repricing of deposits.

Nonetheless, their NIM of 2.14% (adjusted for modification expenses) for the full year stayed below the trend average of 2.20%-2.30% for the last five years.

Although more robust bond trading income and disciplined cost management provided some respite, the eight banks reported a significantly weaker pre-tax return on assets of 0.92% and return on equity of 8.7% in 2020 (2019: 1.36% and 13.2%).

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