KUALA LUMPUR (June 4): Although Malaysian banks’ profitability recovered in the first quarter (1Q), the highly uncertain operating environment as reflected by the recent imposition of a full lockdown continues to cast a shadow over the industry’s profit outlook, said RAM Ratings.

The rating agency said an extension of the two-week lockdown and slower-than-expected rollout of the national vaccination programme will heighten downside risks through heftier provisioning needs and weaker credit demand.

In a statement today, RAM said a noticeable recovery was seen in the banking industry’s profitability in 1Q, following a slump last year.

The top five largest banking groups reported a year-on-year (y-o-y) increase in pre-tax profit ranging from 13% to 114%, after adjusting for one-off items. The improvement was underpinned by a strong rebound in net interest margins (NIMs) amid lower funding costs, and to a lesser extent, lower impairment charges.

“The average NIM of our eight selected local banking groups rebounded 14 basis point y-o-y to an annualised 2.31% in 1Q. This was driven by the gradual repricing of fixed deposits amid the aggregate 125-basis-point cut in the overnight policy rate (OPR) last year and rising proportions of low-cost current and savings account deposits.

“Barring further OPR cuts, their NIM for the full year should be 15-20 basis points higher than 2020’s given reduced funding costs and the absence of sizeable modification losses (incurred in 2Q 2020),” said Wong Yin Ching, RAM’s co-head of financial institution ratings, in conjunction with the publication of the rating agency’s Banking Quarterly Roundup 1Q21.

RAM noted that the banking sector’s loan growth picked up to 3.9% in March (December 2020: 3.4%), fuelled by resilient household lending even though business loan growth remained anaemic.

The agency projected the full-year credit expansion to moderate to about 3%.

“The less optimistic forecast is premised on the prevailing uncertainties and still challenging climate,” it said.

While the extension of the Home Ownership Campaign and vehicle sales tax waiver until end-2021 will support credit demand, RAM said borrowers’ cautious appetite may restrict big-ticket expenditure.

Meanwhile, masked by ongoing loan relief measures, the system’s gross impaired loan ratio kept stable at 1.58% as at end-March (end-December 2020: 1.56%).

RAM noted that loan repayment assistance as well as restructuring and rescheduling (R&R) are still readily available for all troubled borrowers.

As part of the recently announced Pemerkasa Plus stimulus package, the government has also reintroduced the automatic approval for applications from those who have lost their jobs, B40 individuals and affected SMEs to obtain a three-month payment holiday or 50% reduced instalments for six months, it noted.

“Based on the latest available data, about 13% of the eight selected local banks’ domestic loan portfolios were under relief or R&R.

“We expect the proportion to trend upwards given the tighter movement restrictions’ likely adverse impact on businesses and employment. The underlying asset quality will become clearer once forbearance measures are lifted, with impaired loans likely to only peak in 2022,” said RAM.