Banks may face earnings risk from modification loss

PETALING JAYA: Banks could incur modification loss due to the automatic loan moratorium but the quantum would be lower than the RM1.58 billion last year, said CGS-CIMB.

In a report, it said in the worst-case scenario, the modification loss will lower its projected 2021 net profit forecast for the banking sector by 6%.

“Some banks have said that they could incur modification loss in the third quarter of 2021 resulting from the automatic loan moratorium offered by banks under the National People’s Well-Being and Economic Recovery Package (Pemulih) aid package,” the research house said.

It cited Bank Islam Malaysia Bhd CEO Mohd Muazzam Mohamed who had reportedly said that the bank could see another round of modification loss following the one in Q2’20 due to the automatic loan moratorium. However, the magnitude would not be as bad as last year.

“We think that risks from modification loss apply to all Malaysian banks, possibly from the waiver of interest on interest,” it said.

CGS-CIMB said none of the banks have provided any guidance on the exact quantum of modification loss but some of them have said that it will be smaller than that booked in Q2’20.

“We take the amount of modification loss for banks in Q2’20 as the worst-case scenario for 2021. Total net modification loss (some banks did not provide figures for gross modification loss) incurred in Q2’20 was RM1.58 billion. The largest was RM498.4 million for Public Bank while there was a small write-back for Alliance Bank due to its limited exposure to auto loans (1.4% of its total loans).

“Based on these, the modification loss shaves 6% off our projected 2021 net profit for banks under our coverage in the worst-case scenario. This figure is reported net profit, which excludes the one-off provision of RM2.83 billion for 1MDB settlement, impairment of RM1.79 billion for goodwill and RM147.8 million for impairment of investment in associates incurred by AMMB Holdings Bhd in Q1’21.

“We estimate the impact will be the largest for RHB Bank’s 2021 net profit at 15.2%, mainly coming from personal financing and auto loans. While Alliance Bank will not be affected given its small exposure to auto loans,” CGS-CIMB said.

“Even if we include the worst-case scenario in our earnings forecasts, we still project a recovery in net profit growth to 2.9% for banks in 2021 compare to a decline of 10.8% in 2020 excluded the one-off items from AMMB, which is the potential rerating catalyst that underpins our overweight sector call. Our picks for the sector are Public Bank, Hong Leong Bank and Maybank,” it said.

CGS-CIMB has maintained its “overweight” call on the sector.

One potential downside risk to its sector rating for banks is a protracted economic downturn in 2021, it said.