PETALING JAYA: Banks have reported a higher share of business loans with increased credit risks at 13.9%, compared with 11.5% in 2019, indicating signs of businesses facing greater financial stress.
However, the significant relief measures introduced have kept business loan impairment ratios low and stable at 2.5% for overall non-financial corporates (NFCs). During the first half of the year, only one domestic corporate bond downgrade was reported versus seven in 2019, accounting for 0.03% of total corporate bonds and sukuk held by financial institutions.
“The targeted debt assistance and relief measures extended by banks will help viable businesses maintain debt serviceability and avoid widespread defaults. For the period between April and July 2020, banks approved 6.3 times as many applications from businesses to reschedule and restructure (R&R) their loans compared to total outstanding R&R business exposures as at end-2019.
“The outlook for business credit risks will however continue to be highly dependent on the pace and strength of economic recovery,“ Bank Negara Malaysia (BNM) said in its Financial Stability Review – First Half 2020 (H1’20).
The financial performance of Malaysian NFCs deteriorated in the first half of 2020. While the overall debt-servicing capacity of NFCs has weakened, it remained above the prudent threshold reflecting reasonably healthy initial financial conditions before the pandemic.
The central bank pointed out that the impact of the pandemic has been more pronounced on small and medium enterprises (SMEs), with surveys showing that among smaller firms, many have limited financial buffers with cash reserves of only two months or less of expenses.
The lower level of digitalisation among SMEs has constrained their ability to pivot to e-commerce platforms to sustain business activity, particularly during the early phase of the MCO.
Meanwhile, BNM said the number of firms with an interest coverage ratio of less than two times rose to 32.1% of listed firms as at June 2020 (December 2019: 28.1%) despite liquidity positions improving slightly from the first quarter of 2020 as firms conserved cash reserves.
Total outstanding debt of the NFC sector grew by 3.8% annually to RM1.6 trillion or 108.1% of GDP as at June 2020, mainly attributed to lower repayments due to the moratorium and an increase in working capital loans. Aggregate new loans disbursed to NFCs however declined 3.4% as demand for financing moderated sharply and banks reassessed business sector risks.
“While larger issuances of government bonds going forward could see some crowding out of corporate funding in the debt market, the majority of corporate bonds maturing this year continue to be highly-rated, further mitigating refinancing risks.”
Corporate sector external debt increased by 4.9%, mainly driven by additional borrowings by firms in the oil and gas-related sector and valuation effects following the weaker ringgit during the first half of 2020 against selected major and regional currencies.
Risks to financial stability from external borrowings remain manageable as borrowings are mostly medium- to long-term in nature and hedged against exposures to currency movements.
Business conditions are expected to improve in the second half of the year, in line with the gradual improvement in economic activity. The extension of targeted financial relief measures will continue to help support businesses alongside corporate and SME guarantee schemes as the recovery takes a stronger hold.
More importantly, greater visibility on loan performance from the transition to more targeted repayment assistance remains important to reduce risk aversion and improve credit supply during the recovery phase.
However, vulnerabilities remain elevated for sectors that may see a slower recovery, particularly tourism-related sectors and high-touch service industries where border restrictions and precautionary consumer behaviour continue to weigh on business activities. Risks of Covid-19 infections rising again could also affect global demand.
Source: https://www.thesundaily.my/business/businesses-face-greater-financial-stress-but-loan-impairment-ratios-remain-low-stable-FN4609766