Malaysian banks setting aside more provisions in pre-emptive measures

PETALING JAYA: Domestic banks are setting aside more provisions, after reporting heavier year-on-year impairments in the first quarter of 2020, as they proactively increased their loss-absorption buffers amid the challenging landscape.

RAM Ratings said that despite a still-benign gross impaired loan (GIL) ratio, banks are bracing against possibly higher loan delinquencies when the six-month moratorium on individual and SME loans expires at the end of September.

“The average credit cost ratio spiked up to 62 basis points (bps) from 18 bps (or 25 bps after adjusting for a one-off item) in 1Q’19. One bank also incurred higher provisions due to a lumpy default in its Singaporean operations,” said RAM’s co-head of Financial Institution Ratings Wong Yin Ching.

Wong said the domestic banking system’s asset quality remained robust with a GIL ratio of 1.55% as at end-May 2020, compared with 1.51% as of end-December 2019. “We envisage the system’s GIL ratio to stay below 1.70% in 2020, primarily supported by the relief measures that will protect banks’ asset quality from borrowers’ short-term repayment difficulties. That said, troubled loans are expected to surface in 2021,” she said.

Meanwhile, the eight local banking groups reported a notably lower average pre-tax ROA of 1.10% and ROE of 10.7% in 1Q’20 (1Q 2019: 1.43% and 13.2%).

With expectations of further erosion of net interest margins, elevated credit costs and modification charges arising from non-accrual of interest (or profit) on deferred instalments of fixed-rate auto and Islamic financing under the six-month moratorium, banks’ profitability is seen to remain under pressure this year.

Domestic loan growth kept stable at 3.9% in May 2020, with business loans outpacing the expansion in household financing. On the other hand, the closure of property and auto showrooms during the lockdown coupled with downbeat consumer sentiment had resulted in a steep decline in individuals’ spending on discretionary big-ticket items.

Wong highlighted that while the loan moratorium will help slow down the normal rate of principal reduction, it is not indicative of real credit demand. Overall, the banking industry’s loan growth is projected to taper off to 1%-2% in 2020.

source https://www.thesundaily.my/business/malaysian-banks-setting-aside-more-provisions-in-pre-emptive-measures-FJ2759337