No spike in net credit cost in sight amid Covid-19, oil price turmoil

PETALING JAYA: Banks are expected to perform better this time around amid the Covid-19 pandemic and oil price woes, with no drastic rise in net credit cost (NCC) in sight.

This is attributed to more cohesive efforts to lessen the pressure from the outbreak while oil and gas (O&G) firms are in much better financial shape now than before, according to HLIB Research.

The research house explained that, firstly, banks are offering financial relief to existing borrowers affected by the outbreak and Bank Negara Malaysia (BNM) has allocated RM2 billion to support afflicted SMEs in sustaining their business operations.

“Similar measures were taken in the past to deal with SARS (but smaller in scale) have proven to be effective. Back then, the wholesale, retail, restaurants & hotels and air passenger travel segments recovered rapidly in a short three to six months.”

In addition, the restructuring & rescheduling of loans affected by Covid-19 will not be tagged as impaired.

Secondly, HLIB said, O&G companies now mostly have a stronger balance sheet compared to 2014-2016 when there was also an oil shock, thanks to a combination of cash call, debt restructuring, and deleveraging efforts.

“Also, the O&G sector’s debt-servicing capacity has improved where interest coverage ratio stood at 3.0 times in June 2019, versus 1.5 times in December 2018.”

The O&G sector accounts for less than 3% of total loans but retail-centric banks such as Public Bank and Hong Leong Bank have less than 1% exposure.

The research house also highlighted that banks have pared down their O&G loans exposure over the past three years by 1-2 percentage points.

Meanwhile, it said the three overnight policy rate cuts in less than a year totalling to 75 basis points (bps) should help borrowers to uphold their financial obligations better when fall due.

HLIB estimated that every 0.1% of loans turning bad could raise NCC by 10bps and reduce the sector’s earnings by 5%.

“Currently, we are projecting NCC to increase 5bps in 2020 followed by another 1bps in 2021; this brings our 2020-2021 NCC to 27-28bps (above its five-year mean of 23bps).”

To recap, NCC inched up 2bps to 127bps during the 2003 SARS epidemic while the 2014-2016 oil crisis saw this jumped 10bps to 24bps.

“Comparing to similar events in the past, we believe the impact of Covid-19 and oil price crash may not be overwhelmingly negative for banks. Nonetheless, bad sentiment is hard to shake off and the already muted sector growth outlook is not helping.”

However, it is consoled by the sector’s inexpensive valuations and retained a neutral call on the sector, advocating selective stock picking. Its preferred pick is CIMB while other “buy”ratings are RHB, BIMB, and Alliance.

source https://www.thesundaily.my/business/no-spike-in-net-credit-cost-in-sight-amid-covid-19-oil-price-turmoil-MA2121482