Banks likely to up its buffers to tide over latest moratorium
KUCHING: Malaysians banks will likely increase their provision buffers in the second half of 2021 (2H21) due to the latest six-month moratorium but analysts believe that the additional overlays will not likely be as substantial as in 2020, during the first automatic moratorium roll-out.
In a report, the research team at AmInvestment Bank Bhd (AmInvestment) highlighted: “We expect banks to further top up their provision buffers in 2H21 (additional overlays) due to the latest six-month moratorium (opt-in).”
It noted that applications for loan repayment assistance are expected to rise from the percentages seen in April and May 2021.
However, it pointed out that the take-up rate for the latest moratorium is expected to be much lower than that seen in 2020 under the automatic blanket moratorium (April to September 2020).
“This is in view of the continued accrual and charging of interest for all loans and financing. Hence, this will see only borrowers requiring the moratorium opting in,” it said.
“On the latest 6-month moratorium, it is likely to still see banks conservatively topping up provisions (additional overlays).
“Nevertheless, we do not expect these additional overlays to be substantial in amount unlike that seen in 2020. This is on the expectation that the economy is anticipated to progress towards recovery with the gradual opening of more economic sectors after achieving herd immunity against Covid19 through mass vaccination,” it opined.
It projected lower provisions for this year compared to 2020 with a credit cost of 50bps (2020: 60bps) as 2020 saw banks frontloading provisions, building up significant pre-emptive allowances for loan losses in the form of management overlays and/or macro provisions.
“1Q21 continued to see banks being conservative, topping up provisions (AMMB Holdings Bhd’s RM304 million macro provisions, Malayan Banking Bhd’s RM200 million provisions as management overlay, RHB Bank Bhd’s RM94 million additional pre-emptive provisions for potential impact of Covid-19 effects, CIMB Group Holdings Bhd’s RM103mil overlay for its Indonesia consumer loan portfolio, Alliance Bank Malaysia Bhd’s RM89.1 million overlay coupled with Hong Leong Bank Bhd’s pre-emptive provisions of RM55 million).
“On a comforting note, the provision buffers built up by banks since last year are largely unutilised, thus are anticipated to cushion against the impact of the latest lockdown,” AmInvestment explained.
It also expected a much lower mod loss in the third quarter of 2021 (3Q21) as interest will continued to be accrued with banks waiving only compounded interest and penalty charges. This is unlike 2020 where banks had to waive the accrual of interest on fixed rate hire purchase (HP) and personal loans/financing. All in, AmInvestment pointed out that the country is accelerating Covid-19 vaccinations to cover a higher percentage of the population which is likely to see the gradual reopening of more economic sectors in 2H21.
As such, it expect a gradual improvement in banks’ core fees and commission income riding on the economic recovery in 2H21 to support banks’ non-interest income.
However, it also cautioned that it sees challenges in sustaining investment and trading income in 2H21.
“This is based on our expectation that banks may monetise more of the gains from securities in 1H21 before further pressure from the upward movement in interest rates starts to creep in.”