KUALA LUMPUR, Dec 2 — Banks’ earnings in the third quarter of 2020 (Q3 2020) were beset by elevated provisions levels and concern remains on how the ending of the loan moratorium will pan out given the situation with the Conditional Movement Control Order (CMCO), MIDF Research said today.
“We observed that banks’ earnings were mostly within our expectations, with two under performers. As expected, the earnings of all the banks under our coverage were beset by elevated provisions levels resulting in lower earnings,” it said.
Banks’ continued to add in management overlay in order to provide ample buffer should the current situation lead to stress to its asset quality.
“We saw loan loss coverage being increased, highlighting the cautious stance of the banks. However, provisions were slightly better on a sequential-quarter basis,” it said in a note today.
Net interest income (NII) continued to be weak but this was not surprising given the multiple Overnight Policy Rate (OPR) cuts resulting in net interest margin compression.
In July, Bank Negara Malaysia (BNM) reduced the OPR to 1.75 per cent, a record low since the floor was set in 2004. It maintained the rate in November.
Nevertheless, MIDF noted that there were improvements in the quarter as NIM begin to normalise from the absence of modification loss and better funding cost management.
Meanwhile, non-interest income continued to provide support allowing for the banks to increase their provisions level.
“Our concern remains on how the ending of the loan moratorium will pan out given the situation with the CMCO,” it said.
Maybank Investment Bank Research (Maybank IB Research) also noted that an uptick in impaired loans is to be expected, with the end of the moratorium.
The recommencement of loan repayment from October 1, 2020, has resulted in an uptick in impaired loans, which in absolute terms, rose three per cent month-on-month (m-o-m) in October, and was marginally higher across most consumer loans segments.
The industry’s gross impaired loans ratio moved up to 1.43 per cent in October 2020 from 1.38 per cent in September 2020.
It said there was also a slight slippage in loan growth from 4.4 per cent in September to 4.3 per cent in October 2020.
Household (HH) loan growth was slightly slower at 5.1 per cent versus 5.2 per cent in September 2020 while non-HH loan growth was unchanged at 3.2 per cent year-on-year (y-o-y).
On an annualised basis, industry loan growth slowed to 3.7 per cent in October from four per cent in September 2020.
Deposit growth was slower at 3.9 per cent y-o-y in October 2020 versus 4.7 per cent in September 2020, but the upward surge in current account savings account growth has continued, rising 22.2 per cent y-o-y in October from 20.5 per cent in September.
Meanwhile, CGS-CIMB said it also observed weaker momentum in the leading loan indicators in October 2020, with a decline of 6.1 per cent y-o-y for loan applications versus 16.6 per cent y-o-y in September 2020 and growth of only 0.8 per cent y-o-y for loan approvals as against 4.8 per cent y-o-y in September 2020.
“This supports our expectation of slower monthly loan growth (versus the average pace in Q3 2020) in November-December 2020,” it said in a research note.
“Another observation was the RM1.5 billion or 5.5 per cent m-o-m increase in the total provisions for banks in October 2020. This could signify that banks’ loan loss provisioning (LLP) would remain elevated in the fourth quarter of 2020 (Q4) if the total provisions do not retrace in November-December 2020.”
This could be due to banks’ proactive moves to continue to front load the pre-emptive provisions for Covid-19 in 2020 forecast.
“However, we are not overly concerned about the uptick in banks’ gross impaired loss ratio in October 2020 and potentially high LLP in Q4, as, in our view, these would not derail the recovery in banks’ net profit growth in 2021.”
Similarly, MIDF Research also said that it is sanguine on the sector outlook given the expectation of a recovery in Gross Domestic Product (GDP) and positive development on the vaccine.
Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz recently expressed optimism that Malaysia's 2021 GDP would grow within the range of 6.5 per cent to 7.5 per cent as projected by the government.
He said the 2021 GDP forecast is based on various assumptions, such as the pick-up in economic demand, as well as the Covid-19 vaccine that is widely expected to be available in the first quarter of 2021 which would have a positive spillover effect on Malaysia.
“I am optimistic that the GDP for 2021 will fall within the range of 6.5 per cent to 7.5 per cent, and I am not alone, this is not my projection, but the projection of the Finance Ministry and Bank Negara Malaysia.
“And our forecast is in line with those made by the International Monetary Fund (IMF), World Bank, Asian Development Bank and other rating agencies, which falls within the range of six to eight per cent,” he added. — Bernama
