RAM Ratings: Malaysian banks’ earnings to improve in Q3, Q4

Maybank Tower is pictured at Jalan Pudu in Kuala Lumpur April 24, 2020. The rating agency said banks’ earnings declined significantly in the second quarter (Q2), dragged down by hefty modification losses and pre-emptive provisions, as well as markedly thinner net interest margins (NIMs). — Picture by Ahmad Zamzahuri
Maybank Tower is pictured at Jalan Pudu in Kuala Lumpur April 24, 2020. The rating agency said banks’ earnings declined significantly in the second quarter (Q2), dragged down by hefty modification losses and pre-emptive provisions, as well as markedly thinner net interest margins (NIMs). — Picture by Ahmad Zamzahuri

KUALA LUMPUR, Sept 3 — Malaysian banks’ earnings are likely to improve in the third and fourth quarters but profit performance may remain subdued amid an economic downturn and uncertain operating landscape, according to RAM Ratings.

The rating agency said banks’ earnings declined significantly in the second quarter (Q2), dragged down by hefty modification losses and pre-emptive provisions, as well as markedly thinner net interest margins (NIMs).

The average pre-tax return on assets and return on equity of eight selected local banks fell to an annualised 0.7 per cent and 6.8 per cent, respectively, in the same period.

“Banks’ NIMs were severely crimped by the aggregate 75 basis points cut in the overnight policy rate (OPR) in Q2, which was compounded by modification charges arising from non-accrual of interest (or profit) on deferred installments of fixed-rate auto and Islamic financing under the six-month moratorium.

“Although we expect some respite in the NIM as deposits are progressively repriced at lower rates, the 25 basis points OPR reduction in July along with the likelihood of more cuts on the horizon, will limit the extent of this recovery,” RAM co-head of financial institution ratings Wong Yin Ching said in a statement released in conjunction with the publication of the Banking Quarterly Roundup — Q2 2020.

In addition, the recently announced targeted extension of the loan moratorium beyond September for selected borrowers will also trigger another round of modification losses, although to a much smaller degree, Wong added.

With a large proportion of loans on payment holiday, the banking system’s gross impaired loan (GIL) ratio clocked in at an all-time low of 1.43 per cent as at end-July 2020.

RAM Ratings said the true underlying asset quality will only become apparent after the expiry of Covid-19 loan relief measures.

“Despite the still benign GIL ratio, banks have been proactively building up their provisions in anticipation of heightened defaults next year.

“The average credit cost ratio of the eight selected banks soared to 91 basis points (annualised) in Q2 2020 and is likely to remain elevated in the second half of 2020,” it said.

In July, the industry recorded a 4.5 per cent year-on-year loan growth, underscored by the automatic six-month moratorium on individual and small and medium enterprises (SMEs) loan repayments as well, as various government funding programmes.

“After having shrunk in April and May amid the earlier stages of the lockdown, loan applications and approvals rebounded strongly in the next two months, mainly fuelled by the household segment.

“That said, it remains to be seen if this trend is sustainable, given still feeble consumer and business sentiment. Overall, we expect credit expansion to come in at 3.0 per cent-4.0 per cent in 2020,” it noted. — Bernama

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