Image credit: Malay Mail
KUALA LUMPUR (March 1): A bounce-back in 2021 profits does not tell the full story for Malaysian banks, as an uneven recovery of loans under moratorium could continue to weigh this year, said S&P Global Ratings.
In a statement Tuesday (March 1), the rating agency said at least two drivers of last year's profit bounce are likely to stay on track: lower credit costs (a gauge of provisions) and accelerating loan growth.
However, it said the margin improvement last year has likely run its course for now.
It said nonperforming loans (NPLs) could rise to 2.5%-3.0% in the next 12 months after various moratorium programs expire by mid-2022, as planned.
That compares with a 1.4% NPL ratio in 2021.
S&P Global Ratings credit analyst Nancy Duan said borrowers from small and midsize companies [SMEs] and low-income households are the most vulnerable segments under the loan-relief schemes offered by Malaysian banks.
"Lenders that have larger loan exposure to SMEs and the mass-market consumer banking will lag in their recovery behind those with established niches in the wealthy retail segment and big corporate,” she said.
S&P estimates that credits to SMEs and low-income households account for roughly 30%-35% of the industry-wide loan book.
It said a recently announced RM40 billion government relief program that specifically targets micro, small and medium-size enterprises and the informal sector will help facilitate much-needed business recoveries for small businesses.
Still, it said this is unlikely to forestall the weakening underlying credit trend of those borrowers.
On the other hand, it said the sector's high provision coverage of non-impaired loans at around 1.3% as of end-2021 is a positive for credit costs.
It said this compares with the low 0.8% coverage pre-COVID.
Duan said banks could start unwinding the accumulated provision buffer for non-impaired loans in the second half of 2022, once the dust of moratorium uncertainties settles.
"This could meaningfully reduce the need for additional provisions despite rising NPLs,” she said.
S&P said it is likely to materially revise down its 2022 sector credit cost forecast from the current 55-60 basis points if Malaysia's economic recovery remains firm and the transition to an endemic phase proceeds as planned.
Nevertheless, it does not think the banking sector's credit cost will normalise to pre-COVID levels anytime soon, unlike for its peers in Singapore.
S&P estimates Malaysian banks will expand loans by 6% in 2022, compared with the 4.5% loan growth in 2021.
Specifically, it said higher capital spending, a booming oil and gas market, and the competitive financing cost of bank loans amid capital market volatility will revive loan demand among big corporates.
The agency said it will take longer for consumer and SME lending to recover as a result of the still fragile consumer confidence, the magnitude of the SME stress throughout COVID-19, higher inflation, and already elevated household indebtedness.
S&P said Malaysian banks will face more downward pressures on net interest income (NIM) in the first half of 2022 as their funding cost starts to rise and deposit competition intensifies.
It said the NIM could stabilise in the second half.
It said this is because Bank Negara is likely to hike its overnight policy rate by 25 basis points by June, which means local banks will benefit from somewhat rising loan yield.
Source: https://www.theedgemarkets.com/article/mixed-fate-relief-loans-could-drag-malaysias-banking-recovery-says-sp