RAM Ratings expects Malaysian banks' profits to remain subdued despite improvements in second-half 2020

PETALING JAYA: Malaysian banks’ earnings are expected to improve in the third and fourth quarters of 2020, but the sector’s profit performance is likely to remain subdued through the rest of the year amid the economic downturn and highly uncertain operating landscape, according to RAM Ratings.

It pointed out that the banks’ earnings declined significantly in second-quarter 2020 (Q2’20), dragged down by hefty modification losses and pre-emptive provisions as well as markedly thinner net interest margins (NIMs).

Subsequently, the average pre-tax return on assets and return on equity of eight selected local banks fell to an annualised 0.7% and 6.8%, respectively, in the same period (Q1’20: 1.10% and 10.7%).

The rating agency’s co-head of financial institution ratings, Wong Yin Ching, noted that banks’ NIMs were severely crimped by the aggregate 75 bps cut in the Overnight Policy Rate in Q2’20, compounded by modification charges arising from non-accrual of interest (or profit) on deferred instalments of fixed-rate car and Islamic financing under the six-month moratorium.

Although some respite in NIMs is expected as deposits are repriced at lower rates, she said the 25 bps cut in the key rate and the likelihood of more cuts will limit the extent of this recovery.

“The recently announced targeted extension of the loan moratorium beyond September for selected borrowers will also trigger another round of modification losses, although to a much smaller degree,” said Wong.

RAM Ratings highlighted that with a large proportion of loans on payment holiday, the banking system’s gross impaired loan (GIL) ratio clocked in at an all-time low of 1.43% as at end-July 2020, compared with 1.53% at end-December 2019.

It opined that the true underlying asset quality will only become apparent after the expiry of Covid-19 loan relief measures.

Despite the still-benign GIL ratio, the rating agency said banks have been proactively building up their provisions in anticipation of heightened defaults next year. This has led to the average credit cost ratio of the eight selected banks going up to 91 bps (annualised) in Q2’20 (Q1’20: 62 bps) and is likely to remain elevated in the second half of the year.

On the whole, the industry recorded a 4.5% year-on-year loan growth in July 2020 (2019: 3.9%), underscored by the automatic six-month moratorium on individual and SME loan repayments as well as various government funding programmes.

RAM Ratings noticed that loan applications and approvals rebounded strongly in June and July, fuelled mainly by the household segment, after having shrunk in April and May in the earlier stages of the lockdown,

Overall, the rating agency expects credit expansion to come in at 3-4% in 2020.

source https://www.thesundaily.my/business/ram-ratings-expects-malaysian-banks-profits-to-remain-subdued-despite-improvements-in-second-half-2020-AA3828442