NO ACCRUED INTEREST: IMPACT BIGGER ON 4

Affin Hwang keeps ‘underweight’ call on banking sector, sees weaker earnings

DROPPING accrued interest on hire-purchase loans and fixed-rate Islamic financing will be more negative for Public Bank Bhd, Malayan Banking Bhd (Maybank), AMMB Holdings Bhd and Hong Leong Bank Bhd that others, said Affin Hwang Capital.

It said this was because the four had higher exposure to hire-purchase loans particularly.

Public Bank has the highest exposure as hire-purchase loans make up RM51.77 billion, or 15.7 per cent, of its total outstanding loans as at the end of last year.

For Maybank, hire-purchase loans accounted for RM49.9 billion, or 9.5 per cent, of its total outstanding loans of RM523.49 billion as at the end of last year, said Affin Hwang.

The firm said the banking sector would have to take a larger “modification loss’” on their income statements if Bank Negara Malaysia heeded the Finance Ministry’s call to waive the accrued interest.

A modification loss is the difference in the gross carrying amount of a loan (or financial asset) based on the difference between the present value of the modified contractual cash flows vis-a-vis the present value of the original contractual cash flows before any modification to the terms of the loan.

“Public Bank, Hong Leong Bank, Maybank, Affin Bank and AMMB may have a larger modification loss being recognised in their income statement vis-a-vis banks with more variable rate loans arising from the moratorium period granted,” said Affin Hwang yesterday.

The firm has maintained its “underweight” call on the banking sector as it expects a deterioration in earnings while additional measures by Bank Negara have put further pressure on banks’ liquidity and funding.

Putra Business School Associate Prof Dr Ahmed Razman Abdul Latiff said banks would incur some RM2 billion income losses if the accrued interest on the loans was lifted.

Banks that offered predominantly fixed-rate financing would suffer more, he added.

Razman said interestingly, the major shareholders of all nine local banks listed on Bursa Malaysia were government institutions such as the Employees Provident Fund, Permodalan Nasional Bhd and Khazanah Nasional Bhd.

“Therefore, if these banks post reduced profits for the year, their investors will receive lower dividends.

“Perhaps the middle ground is to allow a moratorium for six months without charging the accrued interest but the banks will receive some form of tax exemption so that their annual profits will not be affected much.

“This way, the individuals can still benefit from the moratorium and banks will not suffer from the modification loss,” he said.