KUALA LUMPUR (July 1): Malaysia's announcement of another sweeping loan moratorium will further delay the recognition of non-performing loans (NPLs) of Malaysian banks into 2022 and may lengthen the time needed for the banks' credit cost and profitability to revert to normal, said Fitch Ratings.
The rating agency said in a statement yesterday that the opt-in nature of the latest scheme suggests that the amount of loans seeking a moratorium will be materially lower than in 2020, but added that it expects the proportion to still rise significantly in light of the continued financial strains households and small businesses face due to a prolonged lockdown.
It said the government reintroducing a blanket six-month moratorium on all loans to individuals and micro, small and medium enterprises (MSMEs) on Monday as part of a RM150 billion relief package amid an extended nationwide lockdown echoes the first six-month moratorium implemented for the same borrower segments last year, except that they will now have to apply for the deferral, but approvals will be unconditional and automatic.
According to Fitch, loans under relief among the six largest banks accounted for an estimated 12% of aggregate loans at the end of the first quarter of 2021 (1Q21), down from a peak of about 57% in mid-2020.
Fitch said the new moratorium will delay the peak in NPL ratios to later in 2022 than it previously expected.
“However, borrowers will benefit from both the payment holiday and additional fiscal transfers and pension fund withdrawals.
“We have thus revised our projection of the banking system's NPL ratio to rise only marginally by end-2021, from 1.6% as of May 2021, and we now expect it to peak at below 2.5%,” it added.
Fitch noted that the moratorium's temporary suppression of NPL ratios until at least 1Q22 suggests that loan-loss allowances to impaired loans are becoming less accurate indicators of the banks' loss-absorption buffers in the interim.
“Allowances as a percentage of loans have become more relevant, rising to 1.8% for the banking system by May 2021 from 1.2% at end-2019.
“Assessments of the banks' resiliency will also continue to take into account the different collateralisation inherent in the banks' lending models,” it added.
While reported NPLs may stay low in 2021 with problematic retail and MSME loans not falling due until 2022, the challenging economic environment remains, Fitch stated.
“We believe the banks' expected credit loss models will continue to include higher macroeconomic variable and management overlays to account for the elevated uncertainty, which means credit cost will remain high in 2021 and 2022, albeit lower than 2020's levels,” it said.
“Reduced visibility of customers' financial health and repayment behaviour may also give rise to heightened caution among the banks and lower their appetite for loan growth,” it added.
It noted that the delay in the banks' recognition of impaired loans and consequent smoothening of provisioning and profitability do not have an immediate effect on their ratings as Fitch assesses their credit profiles over longer horizons than several quarters.
“We lowered our rated banks' asset quality and profitability factor scores at the onset of the pandemic, and we continue to see sufficient rating headroom at current levels,” it added.
Fitch pointed out that its assessment of the banks' ratings could change if there are unexpected shifts in the way they navigate the prolonged credit overhang.
“Looser credit provisioning policies, higher growth targets or more aggressive capital management that are not reflective of risks in the operating environment could lead to less favourable assessments of risk appetite and managerial finesse, which could pressure ratings. Conversely, consistent demonstration of prudence would reinforce the banks' factor scores and underpin their viability ratings,” it noted.