Loan growth to taper as Covid-19 impacts businesses

PETALING JAYA: The banking system loan growth is expected to taper moving ahead, due to the Covid-19 outbreak impacting businesses which is likely to result in a drop in loan demand.

In a note by AmInvesment Bank Research, this follows an uptick in industry loan growth to 3.9% year on year (yoy) in February 2020.

“We expect banks to be less aggressive in expanding their loan books ahead. Financial institutions are likely to focus on actively restructuring and rescheduling loans of borrowers impacted by the pandemic virus,” the research house said in a report yesterday.

This is in addition to bank providing automatic moratoriums to individual and SME borrowers to defer their repayments by six months.

“We see that this will prevent loans from falling into to impaired status significantly after the end of the moratorium.”

AmResearch also expects banks’ net interest margins to be compressed in 1Q20 owing to the two Overnight Policy Rate (OPR) cuts on Jan 22 and March 3, 2020.

It retained its neutral rating on the sector with a downgrade in recommendation for Alliance Bank Malaysia Bhd to “hold” from “buy” as the share price has surged to its fair value of RM1.90 a share. Its top picks are Malayan Banking Bhd (Maybank) and RHB Bank Bhd.

In February, loans for the business segment grew 2.4% yoy to RM784.8 billion, while retails loans grew 5.2% yoy to RM906.4 billion. Loans applied grew 40.7% yoy in February, while loans approval also saw significant jump expanding 23.2% yoy resulting in the year-to-date growth of 7.4% yoy.

The average lending rate was 3.8 basis points lower month-on-month to 4.6%, driven by the 25 basis point OPR cut in January.

Gross impaired loan (GIL) ratio continued to edge up to 1.57% while the outstanding impaired loans rose by 4% year to date, attributable to some stress in lending to certain sectors, such as financing activities, household transportation and manufacturing sectors.

On the other hand, industry deposit growth shrank slightly to 2.8% yoy. Growth of deposits from individuals moderated to 5% yoy while that of business enterprises registered a higher contraction of -1.1% yoy compared -0.9% yoy in the preceding month.

MIDF Research believes that the slower deposits growth suggests that banks are pacing themselves in view of another OPR cut.

It added that the lower lending and deposits rate could also signal that deposits competitions were waning in light of the expectation then of another OPR cut.

“Overall, we note that the gross impaired loans ratio seems at a manageable level. However, we are keeping an eye on this given the possible impact of Covid-19 and the movement control order (MCO) implemented in middle of March, for one month,” it said.

MIDF is maintaining its positive stance on the sector, with its top picks being Maybank, CIMB Group Holdings Bhd and Public Bank Bhd.

Menawhile, RAM Ratings said the asset quality of banks remains resilient amidst the weaker macroeconomic backdrop.

“Based on our analysis, banks are well positioned to weather looming asset quality challenges arising from the Covid-19 pandemic and plunging oil prices.

“Public Bank, Hong Leong Bank and Citibank stayed in the top three spots in terms of GIL ratio, with all three banks reporting a commendable GIL ratio of less than 1% as at end-September 2019,” it said in a statement.

Additionally, the common equity tier-1 capital ratios of all the banks in its sample were above 12% as at end-September 2019, significantly higher than the minimum regulatory requirement of 7% and the more stringent capital requirements imposed on those designated as D-SIBs.

source https://www.thesundaily.my/business/loan-growth-to-taper-as-covid-19-impacts-businesses-JY2203957