KUALA LUMPUR, March 30 — Public Investment Bank Bhd (PIB) has made a “neutral” call on the banking sector following the unprecedented effects of the Covid-19 pandemic.
The bank said Covid-19 has evolved into a full-blown global pandemic that has thrown governments and central banks into a state of quandary, disrupting the global supply chain through the extended closures of factories.
“Market commentators are now talking of a global recession with the breakdown in demand-supply dynamics,” it said in a statement today.
PIB said Bank Negara Malaysia (BNM) has been proactive, cutting the overnight policy rate (OPR) in January by 25 basis points (bps) and a further 25 bps in March.
To inject further liquidity into the financial system, the central bank had also reduced the statutory reserve requirement (SRR) to two per cent from 3 per cent previously.
PIB noted that the banking sector is currently facing a triple threat — compressed margins (from possibly more OPR cuts), slower loans growth from the sluggish economic momentum and weaker asset quality through possible business shutdowns.
While the reduction of rates and offering of loan moratoriums may appear to be net negative to the sector, the moves are necessary to stem potential asset quality issues which may have an even more negative impact on the sector, and consequently, stock valuations, it said.
However, PIB said even before the onset of the global pandemic and concerns over a recession, demand for credit had already been sliding down a slippery slope.
The OPR cut in May last year has failed to lift demand, let alone the cuts in January and March this year, it said.
“We reckon this may have had a lot to do with the waning confidence in domestic conditions then, rather than considerations over the seemingly weakening global environment.
“Even as the cumulative 75 bps reduction in the last nine months provide some relief through lower repayments, we think it will only be a matter of time before demand kicks in more sharply as confidence returns.
“We believe loans growth momentum will pick up more convincingly in the second half of this year,” PIB said.
While loans for purchases of fixed assets continue to be an issue — although the quantum is relatively small — asset quality weaknesses are being seen in mortgage and working capital loans; and altogether, the three segments account for about 58 per cent of impaired loans, it said.
BNM’s recent move to offer loan repayment moratoriums to individuals and small and medium enterprises is therefore a timely move, as it will provide some breathing space to borrowers possibly shorn of cash flows, said PIB.
However, it is also imperative that the domestic economic growth regains its momentum soonest possible, it said. — Bernama