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Bad loans likely to go up in the coming quarters
PETALING JAYA: Bankers and analysts who track the banking sector are paying close attention to the asset quality of lenders given that bad loans are expected to continue to increase in view of the current tough economic environment.
AMMB Holdings Bhd (Ambank) group chief executive officer Datuk Sulaiman Mohd Tahir said the lender is looking at asset quality “quite vigilantly” and would continue to be proactive in terms of its risk management with a “heightened focus” on its gross impaired loans (GIL) portfolio and delinquency.
“Our asset quality is in a stable range, all things equal, we do not foresee any major adverse impact on asset quality. However, we remain mindful of factors impacting the global economy,” Sulaiman told Starbiz.
He said “by and large, Malaysians are managing their borrowings. People are paying their debts on time.”
Local banks had extended moratoriums, also known as a reprieve from loan payments, to customers when the Covid-19 pandemic hit back in early 2020 as many were
unable to service their loans then.
Since then, the moratoriums had been slowly rolled back even as the economy fully reopened and business activities started their gradual climb back to normal levels.
RAM Ratings co-head of financial institution ratings Wong Yin Ching said bad loans would “inevitably” inch up in the coming quarters as a large portion of relief measures have expired, alongside soaring inflationary pressures and increased borrowing costs that may affect certain pockets of highly leveraged borrowers.
“The Malaysian banking system’s gross GIL ratio stood at 1.82% as at end-september 2022. Overall, we anticipate the GIL ratio to come in at about 2% at the end of the year, which is still a healthy level,” said Wong.
She noted that banks remained accommodative in extending additional financial assistance to distressed borrowers on a case-bycase basis, which could contain the rise in impaired loans.
“RAM does not envisage provisions to rise in tandem with impaired loans in view of the large provisioning buffers built up since the onset of the pandemic.
“The average credit cost ratio of the eight (major local) banks receded to 24 basis points (bps) in the first half of this year from 55 bps in the previous corresponding period.
“Despite weaker investment and trading income, banks’ pre-tax profits are likely to see some marginal upside this year from lower impairment charges and slightly broader net interest margins,” Wong said.
Meanwhile, MIDF Research banking analyst Samuel Woo also said Malaysian banks could expect to see some level of asset quality deterioration from the expected upcoming economic downturn.
“But it’s not expected to be severe. Banks have good buffers, have been pretty conservative with their credit underwriting recently, and are expected to provide additional macroeconomic overlays in either this or the following quarter,” he said.
He noted that while the overall GIL ratio
had worsened, this was expected following the graduation of loans from repayment assistance programmes.
“As mentioned previously, yes, there might be a slight deterioration, but we doubt that it will be any cause for concern,” he said.
He also said banks could likely raise credit costs in the coming quarters.
“However, credit costs for previous quarters have been well below banks’ guidance for the year – so this will be very much within expectations.”
Former investment banker turned private investor Ian Yoong who tracks the banking sector closely is not as optimistic.
“It is highly likely that there will be a global recession in the first half of next year and the Malaysian economy will not be spared.
“If indeed the highly anticipated global economic recession comes around, banks’ asset quality will be greatly impaired,” he said.
He noted banks had started to unwind the repayment assistance offered to borrowers since the third quarter of last year.
“The potential risk from this is a spike in banks’ gross impaired loans, mainly from borrowers with financial positions severely impaired by the Covid-19 outbreak.
“Should the industry’s gross impaired loan ratio increase significantly above the projected 2% to 2.2% by end December, banks would have to increase their loan loss provisioning,” Yoong said.
He also reckoned that the growth in net interest margins of Malaysian banks would
most likely taper off by next year with the US Federal Reserve Board putting a halt to its recent consecutive increases of interest rates.
“Warren Buffett’s quote of ‘only when the tide goes out do you learn who has been swimming naked’ is appropriate for the banking sector in 2023,” Yoong said.
“The tide is definitely receding. The banking sector on Bursa Malaysia has outperformed other sectors by a mile in recent times, it would be best to take some money off the table.”
Ambank’s Sulaiman said while headwinds would continue, the local economy is expected to be supported by firm domestic demand, improving labour market conditions, higher tourist arrivals and the roll-out of multi-year investments.
“Despite ongoing uncertainties, we achieved an exceptional upswing in the first quarter ended June 30 with an improved net profit after tax and minority interests of Rm419.2mil,” he said.
“Looking ahead, we are very much focused on growing our business organically by looking into strategic initiatives that allow us to achieve cost savings.”
Sulaiman also noted that Malaysia’s second quarter’s gross domestic product (GDP) was 8.9% which is “very strong”.
“The third quarter GDP is even higher at 14.2%. From this vantage point, we are confident that 2023 will continue to see GDP growth, between 4% and 5%. We have a diversified economy, with multiple sectors to depend on,” he added.