KUALA LUMPUR: The country’s banking sector is expected to be under constraints this year especially in terms of income and loan growth due to effects from the Covid-19 pandemic which has adversely impacted the local as well as the global economy.
Despite this, well-capitalised Malaysian banks will be facing the headwinds from a position of strength and make a strong recovery.
MIDF Amanah Investment Bank Bhd’s senior analyst Imran Yassin Yusof viewed there is still a lot of uncertainties plaguing the banking sector in terms of the impact of the pandemic on the local economy.
“It is very difficult to give a timeline for when banks would recover as it depends on how fast or the magnitude of the economic recovery.
“However, we believed Malaysian banks will be facing the headwinds from a position of strength, due to the fact that Malaysian banks are well capitalised, hence it would be able to weather the current crisis. We opined that Malaysian banks will recover as the economy starts to recover,” he told Bernama.
Meanwhile, a report said Malaysian banks’ credible underwriting standards and sufficient earnings, as well as capital buffers, should help it to contain the impact from the pandemic.
But as China is Malaysia’s largest export market, a sharp slowdown in China would erode corporate earnings, it said.
In an effort to assist individuals and businesses to mitigate the adverse impact of Covid-19 pandemic, the Malaysian Government had dished out an RM250 billion stimulus measures called the Prihatin Rakyat Economic Stimulus Package (Prihatin)
Included in the stimulus package is a six-month loan moratorium to all individual and small and medium enterprise (SME) borrowers beginning from April 1, 2020, excluding credit card balances which can be converted to term loans of not more than three years with interest cap of 13 per cent per annum.
Analysts opined the moratorium would test the resilience of the banking institutions as it will strain their liquidity and working capital, which is also needed to cover interest expense, overheads and for lending activities.
Commenting on the moratorium, Putra Business School associate Prof Dr Ahmed Razman Abdul Latiff estimated that banks would incur some RM2 billion losses in income with the lifting of accrued interest on loans with banks offering predominantly fixed-rate financing would suffer more.
He said with major shareholders of all nine local banks listed on Bursa Malaysia are government institutions such as the Employees Provident Fund, Permodalan Nasional Bhd and Khazanah Nasional Bhd, it is worth noting that their reduced profits for the year would also mean lower dividend for their depositors and investors.
“Perhaps the middle ground after waiving the accrued interest, the banks should receive some form of tax exemption so that their annual profits will not be affected much.
“This way, the affected individuals can still benefit from the moratorium and banks will not suffer from the modification loss,” he said.
Meanwhile, Bank Muamalat Malaysia Bhd head economic Izuan Ahmad said the adverse impact of slower economic growth on the local banking sector is inevitable as the credit standing and financial condition of both the household and business segments would determine the loan/financing growth and asset quality of the banking system.
Citing the BNM revision of Gross Domestic Product (GDP) growth of -2.0 per cent to 0.5 per cent for 2020, he said the local banking system is also expected to undergo slower loan/financing growth of within 1.0-2.0 per cent this year.
Asset quality is now projected to be weakening (nearing 2.0 per cent impaired ratio) due to higher payment risks from both the household and business segments, he said.
Izuan said the banking sector is expected to see earnings loss particularly for those with higher exposures to Hire Purchase (HP) financing due to the moratorium interest waiver, coupled with the Net Interest Margin (NIM) compression due to continuous cuts in OPR which could see banks net profit reduced up to an estimated 20 per cent.
According to a research note, Affin Bank Bhd is expected to be the hardest hit by this, because its proportion of HP loans is the highest among local banks, at 23.2 per cent, followed by Public Bank Bhd with 14.5 per cent and AMMB Holdings Bhd with 14.2 per cent.
However, Izuan commented the local banking system’s capital and liquidity positions, are still deemed to be sufficient in order to curb the risks.
He also noted that recovery of the sector would be highly dependent on the overall global and local economic and financial recovery as well as recuperation from the pandemic and its resulting negative impacts.
In a base case scenario whereby, the pandemic could be contained by the end of this year, the growth momentum is predicted to pick up in 2021, with Malaysia among the countries projected to improve significantly at 6.4 per cent GDP growth forecast by the World Bank. Nevertheless, the prolonged outbreak of the virus beyond 2020 would definitely result in a longer recovery period for the local economy, thus delaying the return to normalcy for the local banking sector. – Bernama
