KUALA LUMPUR, March 29 — Malaysian banks will not see normal profit levels return in 2021 despite lower credit costs compared to other Asia Pacific nations, said Fitch Ratings.

Fitch Ratings Singapore director Willie Tanoto said the continued withdrawal of debt relief will cause non-performing loan (NPL) levels to reach an expected 2.6 per cent by the end of 2021.

“Improvement of banks’ profitability is likely to be limited in 2021 as loan impairment charges remain high. We believe banks’ credit costs in 2021 will approach 2020’s level as loan-loss coverage ratios remain low relative to our projections of the NPL ratio, notwithstanding general provisions set aside in 2020,” Fitch Ratings said in a report today.

“Visibility into banks’ asset quality continues to be clouded by repayment assistance programmes and fiscal relief; we estimate total loans under repayment deferral to account for 11 per cent of the six major banks’ portfolios as of February 2021. However, clarity should gradually improve as most of these programmes roll off in the coming months,” it said.

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Tanoto said Malaysian banks must do more to address loan impairments.

“However, their loss-absorption buffers remain adequate as banks’ capitalisation are supported by continued core profitability and subdued balance sheet growth in the near term,” he said.

In the report, it said that the system non-performing loan (NPL) ratio rose gradually after the six-month automatic loan repayment moratorium ended, with 85 per cent of the increase coming from the household sector.

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This is expected to increase in the coming months as Malaysia was under varying levels of lockdown still in the first quarter of 2021.

As the unemployment rate and Covid-19 cases rose since September 2020, Fitch Ratings said economic uncertainty was now higher.

“This marred visibility into banks’ asset quality, which prompted most of the six major banks to increase credit provisions in the second half of 2020 relative to the first half. This improved loan loss coverage to 105 per cent of non-performing loans (NPLs)  —  80 per cent by end of 2019 — most of which came in the form of general provisions.

“Nevertheless, banks’ collective credit costs in 2020 remained the lowest among the Asian Pacific’s emerging markets. Banks’ NPL ratios were suppressed by the moratorium and we project the system’s NPL ratio to rise to 2.6 per cent by end-2021. This means that major banks’ credit provisions will remain high in 2021 and similar to the level in 2020,” said the report.

The report said it did not expect profitability to improve significantly in 2021, despite the economic recovery, as revenue growth is likely to be checked by anaemic loan growth and only a slight increase in the lending margin.

The increase of NPLs after relief programmes expire will raise credit impairment charges above the pre-pandemic average to hamstring the improvement in profitability in 2021.