PETALING JAYA: Banks, which largely recorded weaker second-quarter (Q2) earnings after booking significantly higher net provisions, will continue to be watched with the six-month loan moratorium coming to an end this month.
Loan approvals, which have continued to decline since March, have picked up a little in the past two months following the reopening of the economy.
However, the banks are expected to remain cautious given the uncertainties.
With business sentiment still weak from the disruptions caused by the pandemic, analysts foresee applications for additional financial assistance gaining traction as the month-end draws closer.
Given the option for targeted moratoriums for a further three months, the full extent of asset-quality deterioration on banks may not emerge until 2021, reckoned AllianceDBS Research.
This has led to some banks cautioning of elevated credit costs next year, it said in a report yesterday.
The research firm expects “credit cost trends and asset quality to diverge further in the near term as banks make additional adjustments to their macroeconomic assumptions”.
Towards this end, it noted that banks have actively reached out to their customer base to identify pockets of potential stress within their loans book.
“While on the surface, a fairly large proportion of their books had been identified (between 7% and 14% of domestic loans for banks which disclosed), the actual take-up of additional financial assistance may be less pronounced.
“Nevertheless, the additional extensions of the moratorium, which began on April 1, will translate into further modification losses, ” the research firm said.
On a brighter note, it said banks’ earnings have likely reached a bottom due to the modification losses and large pre-emptive provisions made so far.
In the recent Q2, earnings of banks under its coverage were hit by higher provisions and booking of net modification losses on their respective hire purchase and Islamic fixed financing books.
In total, the banks booked around RM1.9bil in net modification losses during the quarter, to be unwound over the course of the tenures of their respective portfolios.
Excluding the modification losses, sector earnings would have still contracted by approximately a quarter year-on-year (y-o-y), the research house said.
Revenue remained weak with lower interest rates and fee income in Q2 after lockdown measures limited business activity.
Not surprisingly, interim dividends were withheld at almost all of the banks.
While none of the banks have signaled lower dividend payouts so far, AllianceDBS said it lowered its dividend payout assumptions for banks within its coverage.
On the other hand, asset quality improved across most banks.
Cash balances also saw a strong increase y-o-y in Q2, it pointed out.
Overall, most research houses have maintained their “neutral” call on the sector, considering that returns on equity, which are heavily affected by swings in credit costs, are unlikely to excite in the near term.
Sector valuations may remain attractive at 0.9 times forward book value, but a re-rating is only likely when asset-quality concerns become less dire, according to analysts. As for loans, going by the stronger-than-expected loan growth of 4.5% y-o-y at end-July, analysts project loan growth for 2020 to come in between 2.5% to 3% from a previous no-growth scenario.
In a report yesterday, CGS-CIMB Research said the continued improvement in loan growth was a positive takeaway from the July banking statistics.
This, it said, would help to partially cushion the increase in loan loss provision and contraction in net interest margins in 2020.
However, concerns remain on the potential impact on asset quality with the ending of the loan moratorium.
However, MIDF Research said it “does not foresee exacerbated stress to the banking sector as banks face the current headwinds from a position of strength”.
The conducive interest rate environment, should also help keep systemic asset quality risk from spiralling out of control, said analysts.
Source: https://www.thestar.com.my/business/business-news/2020/09/02/all-eyes-on-banks-as-moratorium-nears-end