Concerns mount on banks

Loan loss provisions might stay elevated next year

“A 10-bps increase in our projected credit charge-off rate would lower our financial year 2021 net profit forecast by 5.3%.” CGS-CIMB

PETALING JAYA: Concerns surrounding banks continue to mount as the dateline for the removal of the moratorium given to customers by lenders draws closer.

CGS-CIMB in a report to clients said there could be a risk of banks’ loan loss provisions (LLP) staying elevated next year, as their gross impaired loan (GIL) ratios could spike in the fourth quarter of the year with the conclusion of the loan moratorium period.

“We estimate that a 10-basis-point increase in our projected credit charge-off rate would lower our financial year 2021 (FY21) net profit forecasts for Malaysian banks by 5.3%,” it said.

Recall in March, local banks had announced that they were extending to their customers a six-month moratorium period, beginning from April 1 to Sept 30.

During this time, they did not have to make any loan payments as a way to relieve the burden of those badly affected by the Covid19 pandemic.

CGS-CIMB said in its report that the LLP of the six banks under its coverage that have released their first-quarter results so far had surged 109.4% year-on-year.

This has led it to lift its projected FY20 LLP for these banks by 35.5%.

The total LLP of Rm1.45bil for these six banks was the highest since we started compiling the quarterly numbers for banks in the fourth quarter of financial year 2004, it said.

“We now project a 72% surge in LLP for banks under our coverage in 2020.

“The key concern is that banks’ LLP would remain elevated in FY21, as the negative impact of a high unemployment rate would only be reflected in banks’ fourth-quarter FY20 GIL ratios with the conclusion of the loan moratorium period,” the research house said. “Another risk of a higher LLP for banks in 2021 is a new wave of the Covid-19 outbreak,” it added.

In the comprehensive report, the research outfit also pointed out that it had run several stress tests on banks in relation to higher-than-expected LLPS.

“The stress tests showed that Public Bank Bhd would be the most defensive against any increase in the LLP.

“Conversely, based on our analysis, the impact from an increase in the LLP would be the highest for Alliance Bank Bhd.”

Despite the potential risks from a high LLP in FY21, CGS-CIMB is retaining its “neutral” call on banks, given their reasonable valuations.

The sector’s 2021 price to earnings of 10.7 times is below the five-year historical average of 12.5 times, it pointed out.

“Furthermore, we have priced in the risks for a higher LLP in our target price for banks.

“Based on our stress tests, an increase in the projected FY21 LLP would reduce our target price for banks by only up to 8.3%.”

The research firm said the potential upside/ downside risks for its sector call are an improvement/deterioration in banks’ loan growth and asset quality. “We have factored in 125-basis-point overnight policy rate (OPR) cuts in 2020 in our earnings forecasts for banks. So, another potential downside risk would be OPR cuts of wider than 125bps in 2020.”