Banks to remain resilient

RAM’s co-heads of financial institution ratings Sophia Lee and Wong Yin Ching.

KUALA LUMPUR: RAM Rating Services Bhd (RAM Ratings), which is maintaining a stable outlook on the Malaysian banking sector, is projecting a loan growth of around 3% this year underpinned by expansion of household loans.

RAM’s co-head of financial institution ratings Wong Yin Ching told StarBiz that she anticipates loan expansion will be anchored by growth in household loans while business loans will remain sluggish.

“Auto and home loans – which charted strong growth last year - will continue to benefit from the various incentives for car and property purchases, ” she said, adding that this projection however is subject to downside risks.

These include unexpected delays in the vaccination programme or a new wave of Covid-19 infections, which may necessitate stricter lockdown measures.

In 2020, loan growth clocked in at 3.4%, largely underpinned by the nationwide automatic loan moratorium.

Wong pointed out that RAM Ratings is maintaining its stable outlook on the banking sector for having built up strong capital and liquidity buffers through the years.

“We believe that domestic banks will remain resilient despite the pandemic-ravaged economy, ” she added.

Wong’s colleague, who is also co-head of financial institution ratings at RAM, Sophia Lee estimates that the banking system’s gross impaired loans (GIL) ratio may come in at around 2.3%-2.5% in 2021.

The banking system’s gross impaired loan (GIL) ratio remained low at 1.60% as at end-January 2021.

“We expect GILs to peak only in 2022 after the expiration of all temporary relief measures.

“Banks have been pre-emptively setting aside additional provisions and further build-ups of provisions are likely amid the myriad of uncertainties.

“Our best estimate of this year’s credit cost ratio stands at 60-70 basis points (bps), which is still elevated, ” Lee noted.

The average credit cost ratio of the eight selected banks jumped to 84 bps last year compared with 30 bps in 2019 as a result of proactive provisioning.

The industry has sturdy loss absorption buffers to deal with asset quality headwinds, she said.

Lee said: “The GIL coverage of the eight banks (inclusive of regulatory reserves) had climbed up to 118% as at end-December 2020 (end-December 2019: 107%).

“The banking system remains well capitalised, with its common equity tier-1 capital and total capital ratios coming in at a respective 14.9% and 18.5% as at end-January 2021, ” Lee said.

While some delinquencies had surfaced following the expiry of the automatic six-month loan deferments, Wong said the industry’s asset quality would be upheld by the ongoing targeted repayment assistance (TRA) scheme.

Individual as well as small and medium enterprise borrowers have until June 30 to apply for the TRA scheme.

In addition, banks have been accommodating requests by corporate borrowers to reschedule and restructure (R&R) their loan repayments, as and when required.

According to the latest available data in February, some 13% (ranging from 7% to 18% for individual banks) of eight selected local banks’ domestic portfolios were under TRA and R&R – higher than the 11% as of November 2020, ” Wong said.

Moving forward, RAM Ratings said banks’ earnings are anticipated to improve in 2021 with the absence of modification expenses and rejuvenated net interest margins (NIMs) as deposits would have mostly been repriced at lower rates. That said, overall profitability is likely to remain pressured by elevated impairment charges, the rating agency noted.

Malaysian banks’ earnings in 2020 were weighed down by hefty pre-emptive provisions, modification losses and narrower net interest margins (NIMs).

The poorer showing was partly negated by their robust bond trading income, which is unlikely to be repeated this year.

In 2020, the eight selected local banks reported a lower average pre-tax return on assets of just 0.9% and return on equity of 8.7% (2019: 1.4% and 13.2%).

Concurrently, NIMs were severely crimped by Bank Negara’s slashing of the overnight policy rate (OPR) by 125 bps, compounded by modification charges.

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