Banks set aside more provisions in first-quarter

However, domestic loan growth is stable at 3.9% in May

KUALA LUMPUR: Domestic banks set aside more provisions for loan impairments in the first-quarter ended March 31, as they brace for more delinquencies when the six-month moratorium ends on Sept 30, according to RAM Ratings.

In a statement, it said the banks’ financial results for the first quarter were underscored by heftier loan impairment charges, as they proactively increased their loss-absorption buffers amid the challenging landscape.

Despite a still-benign gross impaired loan (GIL) ratio, banks were preparing for possibly higher loan delinquencies when the moratorium on individual as well as the small and medium enterprise loans expire at the end of September.

“To be prudent, banks are putting aside more provisions. All eight local banking groups reported heavier year-on-year (y-o-y) impairments in 1Q 2020.

“The average credit cost ratio spiked up to 62 bps from 18 bps (or 25 bps after adjusting for a one-off item) in Q1, 2019. One bank also incurred higher provisions due to a lumpy default in its Singaporean operations, ” said Wong Yin Ching, RAM’S co-head of financial institution ratings.

In the rating agency’s banking quarterly roundup Q1 2020, it said the domestic banking system’s asset quality remained robust with a GIL ratio of 1.55% as at end-may 2020 (end-december 2019: 1.51%).

“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, ” the report said.

RAM Ratings said the eight local banking groups reported a notably lower average pretax return on asset (ROA) of 1.10% and return on equity (ROE) of 10.7% in Q1, 2020 (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 was kept stable at 3.9% in May 2020 (2019: 3.9%), with business loans (+4.9%) outpacing the expansion in household financing (+3.2%).

“This may be due to cash-strapped companies drawing down on their facilities to fund fixed operating overheads amid the nationwide lockdown.

“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.

“The loan moratorium will help slow down the normal rate of principal reduction, thus lending some support to loan growth. That said, it is not indicative of real credit demand.”

Notably, loan applications and approvals plummeted a respective 30.1% and 41.7% y-o-y (based on three-month moving average), with those for households contracting more sharply than businesses.

Overall, the banking industry’s loan growth is projected to taper off to 1%-2% in 2020.

“The loan moratorium will help slow down the normal rate of principal reduction, thus lending some support to loan growth.” RAM Ratings