PETALING JAYA: The resilience of the banking sector will be put to test once again with new Covid-19 cases creeping up recently, which have sparked concerns of renewed restrictions.
Looking back at the targeted nature of the movement control order (MCO) 2.0 that was implemented in January where businesses were allowed to operate, the worst-case scenario of an MCO 3.0 would not be that damaging to the economy.
A prolonged recovery, however, is imminent if Covid-19 cases continue to spike as the economy has only started to heal.
OCBC Bank economist Wellian Wiranto (pic below) said there is hope that any new restriction order can spare the bulk of economic activities
“That would limit the economic damage. Still, the impact will remain palpable, hurting the nascent recovery in business and consumer confidence into the second quarter.
“While we and the market do not expect the central bank to cut its overnight policy rate (OPR) on balance, it held the rate unchanged during the previous virus resurgence in January.
“There remains a small tail risk that it might just do so. At the very least, it would start to flag some of the downside risks more vocally and signal that it continues to have some space for further accommodative policy if needed, ” he said.
Bank Negara’s (pic below)monetary policy committee (MPC) will be meeting on Thursday to decide on the OPR direction, which is at an all-time low of 1.75% since July last year.
But even as the banking sector is presented with the same set of issues that affected them last year, sell-side analysts believe that the current situation is only a hiccup for the sector.
MIDF Research said it is a short-term pressure that banks have to overcome.
It believed that the recent surge in Covid-19 cases may lead to localised MCOs that may result in potential stress on banks’ asset quality, but the banks in general will be able to weather it.
“This is evident by how banks weathered the more restrictive MCO of last year.
“In addition, banks had built up large loan-loss reserves over this challenging environment.
“We remain sanguine of the prospects for the banking sector this year, premised on the recovery of the economy, which is made more certain with the vaccine rollout, ” it said, adding that it expected loans’ demand to accelerate, leading to a higher loan growth of 5% this year.
The banking system’s loan growth expanded by 3.9% year-on-year (y-o-y) in March as compared to 3.7% in February.
This was also a better month-on-month growth of 0.7% as compared to 0.1% in February.
The main contributors were mortgage, auto and working capital loans that grew 5.5% y-o-y to RM1.24 trillion.
While the loans’ approval rate fell to 40.6% in the first quarter of this year as compared to 44.1% in the corresponding quarter last year, the amount approved actually grew 3.3% y-o-y to RM89.7bil.
MIDF believed that banks remained cautious as the approval rate fell but this could also be due to higher loan demand as opposed to last year in which banks may not have been able to keep pace with its approvals.
“As with loan demand, the main drivers for the higher loan approvals were for the purchase of passenger vehicles and residential properties.
“Loans approved for purchase of non-residential properties also expanded strongly. We view this as an encouraging sign.
“While banks may still be cautious, we do not believe that it is at a level where credit will be curtailed in the system, ” it said.
CGS-CIMB Research has a positive view on the robust leading loan indicators in March, saying that it bodes well for loan growth in the next one to two months.
It, however, pointed out downside risks to the loan growth arising from the recent spike in Covid-19 cases, which could lead to tighter standard operating procedures and dampen business and consumer sentiments.
The research house said improvements in loan growth and the gross impaired loan ratio supported its “overweight” stance for banks, which was also predicated on the potential re-rating catalyst of an expected recovery in core net profit growth to its projection of 6% this year.
“Based on a read-through of the March 2021 banking statistics, we believe banks’ loan loss provisioning declined quarter-on-quarter in the first quarter from the all-time high of RM4.54bil recorded in the fourth quarter last year but increased y-o-y compared to the RM2.71bil recorded in the first quarter of 2020.
“This is premised on the narrower rise in total provision of RM2.08bil in the first quarter this year versus RM3.59bil in the fourth quarter last year, ” it said.
TA Securities Research is also “overweight” on the sector as it expects the momentum in the domestic economic activities should continue to gradually improve.
Despite uncertainties in terms of the credit outlook, the research house believed that with the central bank proactively monitoring developments closely and ensuring liquidity in the system by relaxing capital and liquidity buffers to support lending activities, this should help keep the systemic asset quality risk in check.
This is further compounded by the efforts of financial institutions in intensifying efforts to identify customers and extending repayment assistance to those in need and the conducive interest-rate environment.