Insight - Rebuilding resilience and confidence

For banks, top priorities include business continuity planning, building of reserves, active management of capital and liquidity positions as well as robust stress testing.

BANKS are building up not only their own resilience but also preparing their customers for financial resilience rather than reliance.

This is done through, among other ways, making it easier for them to receive financial aid and rebuilding their opportunities and relationships especially with the international markets.

For banks, top priorities include business continuity planning, building of reserves, active management of capital and liquidity positions as well as robust stress testing.

Banks may face some liquidity and capital concerns but Bank Negara has been successful in stewarding the sector to financial strength by requiring stronger capital and liquidity measures.

“They have all helped to put the whole economy on a better footing during the various stages of the pandemic,’’ said Public Bank managing director and chief executive officer Tan Sri Tay Ah Lek“They have all helped to put the whole economy on a better footing during the various stages of the pandemic,’’ said Public Bank managing director and chief executive officer Tan Sri Tay Ah Lek

Meanwhile, asset quality and demand for loans will, among other things, be issues of concern.

While banks will continue to be affected by the prevailing Covid-19 challenges, the resilient foundation built over the years will help the industry to navigate through these challenging times.

For Public Bank Bhd, years of prudent risk management and a strong compliance culture, coupled with the buffers built throughout the years, will continue to cushion the adverse impact caused by the pandemic.

“The bank is grateful for various government policies such as the home ownership campaign offering exemption of stamp duty, sales tax exemption on purchase of new vehicles as well as various financing schemes offered.

“They have all helped to put the whole economy on a better footing during the various stages of the pandemic,’’ said Public Bank managing director and chief executive officer Tan Sri Tay Ah Lek.

Although the pandemic has affected its business growth, Public Bank will remain fully committed to provide financial assistance to customers who face financial constraints and support them to navigate through the pandemic.

At Bank Islam Malaysia Bhd, robust stress testing has helped the bank establish specific action plans based on differing scenarios.

“Stress testing would help us understand how emerging risks can impact our profitability, liquidity and capital adequacy,’’ said Bank Islam CEO Mohamed Muazzam Mohamed. (pic below).

Bank Islam Mohd Muazzam MohamedBank Islam Mohd Muazzam Mohamed

Constant engagement with customers has also enabled Bank Islam to build rapport, keep updated on their financial needs and proactively extend the necessary repayment assistance. The opt-in choice for customers who are agreeable to the repayment assistance terms will allow for a balanced approach to protecting lives and livelihood.

Nevertheless, Bank Islam has made pre-emptive impairment provisions last year for any potential losses due to the prolonged economic recovery amid ongoing lockdowns, and is building reserves for the next two years.

Alliance Bank Malaysia Bhd has made pre-emptive management overlay (that tracks a unified management system) to take into account the uncertainties from the pandemic.

“The overlay takes into account our assessment of risk-related to sensitive sectors as well as observed behaviour such as the take-up of loan modifications including moratoria.

“We are well-positioned to absorb the simulated impact of the stress test from a capital and liquidity standpoint,’’ said Alliance Bank Malaysia.

To ensure resilience, banks need to think of ways to help customers beyond the relief measures offered.

Helping customers build financial resilience will enable them to recover more quickly; in the current climate, that is achieved by making it easy for those affected to apply for and receive aid, and supporting the wider customers in a number of ways, said HSBC Bank Malaysia CEO Stuart Milne.

Broadly categorised as “Rebuild, Reconnect and Reimagine,” Milne said these measures include:

> Helping customers rebuild their personal and business finances, and as they get back on their feet, championing financial education and inclusion.

> Reconnecting customers to opportunities and pre-pandemic relationships especially abroad, through the HSBC network.

> Reimagining their lives and business models by, among other things, moving to digital and transitioning to lower carbon, both of which are relevant and fast-moving within South-East Asia.

Banks must make considerations to turn things around rapidly, overcoming financial difficulties and coping with distressed situations, said Standard Chartered Malaysia managing director and CEO Abrar A. Anwar (pic, below).

Abrar A. Anwar, managing director and CEO StanChart MalaysiaAbrar A. Anwar, managing director and CEO StanChart Malaysia

Key initiatives include:

> Technological resilience in digitising and innovating banking models along customer journeys;

> Workforce resilience where banks will have to do more and invest in employee well-being to increase adaptability and productivity;

> Societal and environmental resilience by embracing diversity and inclusion at the workplace.

“Standard Chartered is actively managing our capital position to ensure that we stay stable and sound.

“The strong fiscal foundation that we have laid is helping us immensely in standing by our clients, and we are confident that we will come out of this crisis with even greater resilience,’’ said Abrar.Asset quality

Asset quality is a major concern.

Depending on the period of lockdown and strictness in standard operating procedures, more borrowers may struggle to service their debts or may even default.

“The real impact is likely to manifest in late 2021, or early 2022, given the various forms of relief measures that continue to keep the system’s gross impairment loan ratio at a ‘sedated’ level for the time being,’’ said RHB Investment Bank analyst Liew Wai Hoong.

Banks have been setting aside pre-emptive provisions since 2020 in anticipation of asset quality being impacted.

The loan moratorium and more relaxed loan restructuring suggest that bad loans may not surface immediately; this means that problems faced by banks will be addressed over a longer timeframe.

These measures on loan moratorium and restructuring can help banks survive, but they may also drag on their earnings in the next few years, said former RHB Research Institute chief Asean economist Peck Boon Soon.

While the loan moratorium continues, loan growth will be dented by the lockdown in the short term. This is especially in the demand for business loans, which has been subdued as sentiment turned cautious, said Socio Economic Research Centre Malaysia executive director Lee Heng Guie.

Overall gross and net impaired loans ratio remained broadly stable at 1.6% and 1.0% in May respectively while total provisions set aside against potential credit losses stood at 1.8% of total banking system loans.

Strong buffers

Despite a marginal decline in capital ratios, banks’ excess capital buffers remained strong at RM119.9bil at end-May 2021, but down from RM123bil in December 2020.There is a real risk of a systemic risk hitting the banks if the Covid-19 crisis prolongs much further, said former Inter-Pacific Securities head of research Pong Teng Siew.

As economic performance deteriorates, asset quality will go down as well. The pervasiveness and severity of the drop in asset quality is a matter of judgement for each bank’s management.

The moratorium buys time but the path towards a marked deterioration is already set in, with impact on profits, asset quality, sustainability of balance sheet health and longer term potential.

As many companies are delaying due recognition of losses they now face, in terms of inventory pricing, hedging and forward purchases, the full extent of the pain remains hidden.

“At some point, the dam may break and then, the full extent of the damage to banks’ balance sheets will be unveiled. We are not there yet,’’ said Pong.

As the Covid-19 infections keep mounting, and as we rush to get vaccinated, it is hoped that our immunity will rise to help stave off further disaster.

Yap Leng Kuen is a former StarBiz editor. The views expressed here are the writer’s own.

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