Loan repayment assistance poses risks to Malaysian banks’ asset quality

KUALA LUMPUR: Moody’s Investors Service said the increase in loan under repayment assistance (RA) is credit negative for Malaysian banks because a greater proportion of loans risk becoming delinquent when the facility ends on June 30, especially if economic growth remains subdued.

It said as of Feb 26, the five largest Malaysian banks had reported results for 2020, with Maybank Banking Bhd (A3 stable, a32), Public Bank Bhd (A3 stable, a3), RHB Bank (A3 stable, baa2), and CIMB Group (Baa1 stable), each reporting an increase in loans with reduced or deferred instalments, that is loans benefitting from pandemicrelated RA.

The proportion of loans under RA for these banks increased to 13 per cent on average in February from 11 per cent in November 2020. Hong Leong Bank’s (A3 stable, a3) loans under RA declined to 7.0 per cent in January from 8.0 per cent in November 2020.

“The increase in retail loans under RA is consistent with increased unemployment and underemployment reducing borrowers’ incomes. The increase is being driven by take-up among retail borrowers and vulnerable population segments, including the so-called B40, households whose incomes are at the bottom 40 per cent of the population,” it said in its latest sectoral comment.

Although the Ministry of Finance projects that unemployment will fall to 3.5 per cent in 2021 from 4.8 per cent at year-end 2020, it will still be higher than the pre-pandemic 3.2 per cent at year-end 2019.

In addition to a higher unemployment rate, the timerelated underemployment rate also rose to 2.4 per cent at yearend 2020 from 1.1 per cent a year earlier because of shorter operating hours and job rotation among workers.

The rating agency said its forecast Malaysia’s real gross domestic product (GDP) growth will rebound to around 6.0 per cent in 2021 and remain high over 202223, after 2020 GDP contracted 5.6 per cent as pandemic lockdowns disrupted businesses and slowed the job market. However, a new lockdown in January exacerbates the risk to asset quality and economic growth in 2021.

“RA supports borrowers whose repayment capacity is affected by pandemic-related disruptions to their incomes. Banks tailor RA to a borrower’s needs. B40 households and micro-enterprises can defer monthly repayments for three months or reduce repayments by 50 per cent for six months under the government’s Targeted Repayment Assistance scheme announced in November 2020.”

Nonperforming loan formation has slowed for most banks because loans under RA are not classified as impaired.

As of year-end 2020, gross impaired loan ratios fell across the five banks compared with a year earlier, with the exception of CIMB Group, whose exposure to the oil and gas sector contributed to a deterioration in its asset quality, it said.

“We expect asset quality to deteriorate as support measures to borrowers gradually expire. The extent of the migration to nonperforming loans will depend on the pace of the economic recovery in the second half of this year.”

Nonetheless, Malaysian banks still have strong capitalisation and loan-loss coverage ratios to buffer losses.

On average, the five banks’ Common Equity Tier 1 capital ratio was stable at around 14.4 per cent at year-end 2020 compared with 14.3 per cent a year earlier, while the average loan-loss coverage ratio improved to 148 per cent from 94 per cent as a result of efforts to front-load provisions.

“The banks’ proactive provisioning will prevent a surge in credit costs if, as we expect, asset quality deteriorates this year,” it added. — Bernama