Research houses positive on banking sector despite moratorium interest waiver

In a note today, Maybank IB said the waiver of interest on B50 loans under moratorium is a negative surprise for the sector, which will have to contend with larger-than-expected modification losses (mod loss) this year. — Reuters pic
In a note today, Maybank IB said the waiver of interest on B50 loans under moratorium is a negative surprise for the sector, which will have to contend with larger-than-expected modification losses (mod loss) this year. — Reuters pic

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KUALA LUMPUR, Sept 15 — Maybank Investment Bank (Maybank IB) Research has maintained a positive stance on the banking sector, despite the government’s move to instruct banking institutions to work towards waiving interest payments for loan moratorium recipients.

Yesterday, Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz said the move would involve moratorium recipients from the bottom 50 per cent (B50) of Malaysia’s population for a period of three months, from October to December 2021.

In a note today, Maybank IB said the waiver of interest on B50 loans under moratorium is a negative surprise for the sector, which will have to contend with larger-than-expected modification losses (mod loss) this year.

“Our rough computations point to an average seven per cent impact to earnings for the banks in our coverage.

“We estimated a total mod loss of about RM1.42 billion for the banks in our coverage versus RM1.35 billion back in 2020,” it said.

However, it noted that the mod loss is one-off in nature and the amount can be reclaimed over the loan period.

“There is ample liquidity in the system and the banks are well capitalised. We expected earnings to rebound in 2022 in the absence of such mod losses,” it added.

MIDF Research also maintained a positive stance on the banking sector despite the moratorium interest waiver, saying that the impact would be marginal as it only affects a very narrow segment of the banks’ interest income and does not affect the whole of the banks’ loans book.

However, it noted that the sector may be concerned about the possibility of higher credit costs and pressure on asset quality stemming from the prolonged lockdown of Phase One of the National Recovery Plan.

“Nevertheless, we remain sanguine of the prospects for the banking sector in calendar year (CY) 2021 and into CY 2022.

“Our optimism is premised on the recovery of the economy due to the gradual reopening of the economy, as we believe that the banking sector will be able to absorb higher-than-expected credit cost and pressure on asset quality given the high level of buffers.

“In addition, we also expect that any increase in credit cost will not be at the same magnitude as in CY 2020, given that the situation is different this year,” it noted.

Meanwhile, both RHB Research and AmInvestment Bank Bhd (AmInvestment) have also maintained their ‘overweight’ call on the sector, with the former estimating the interest waiver to have a nine per cent or close to a RM2.3 billion impact on sector earnings.

“The government’s decision to introduce a three-month interest-free moratorium for B50 borrowers has unnerved investors, and we are surprised by the timing and nature of this drastic move.

“We see risks of significant mod losses, given that mortgages make up 36 per cent of system loans. Assuming full impact is taken in Q4 2021, we are potentially looking at a steep decline in sector profitability,” said RHB Research.

AmInvestment said the impact of the three-month interest waiver on banks is manageable, as it only applies to borrowers in the lower-income bracket whose loans are much smaller in ticket size compared to that of the higher income borrowers in the Middle 40 per cent and Top 20 per cent segments.

It said the changes are expected to result in a drop in interest income and net interest margin of banks in Q4 2021, and this will be in addition to the mod loss that banks will report in Q3 2021 results for deferment in the timing of repayments for loans under moratorium.

“We estimated that the interest payment waivers for the seven banks that we cover amount to RM562 million in Q4 2021. The impact to banks’ net profit ranges from 1.4 per cent to 5.8 per cent.

“We also viewed the retracement in the share price of banking stocks from the announcement of this news yesterday as a knee-jerk reaction,” it said, noting that the dip presents investors with opportunities to accumulate banking stocks as the fundamentals of banks remain intact. — Bernama

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