Active client engagement crucial to avoid NPL bubble

This article first appeared in The Edge Malaysia Weekly, on March 30, 2020 - April 05, 2020.

Farid: We are giving ourselves six months, which is a reasonable assumption

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THE moratorium on loans announced by the government last week for households and small and medium enterprises (SMEs) will help protect the banking system and ensure liquidity while shielding the economy from current shocks. However, industry observers point out that this could only serve to delay a debt and impaired loan crisis.

Given this, it is crucial for banks to actively engage clients during the period of the moratorium — by keeping in touch with their situation and helping them normalise their loans.

Looking at publicly available data, impaired loans of households rose 3% month-on-month to RM11.07 billion in January. Total impaired loans in the banking sector increased 2.6% to RM27.54 billion for the same period.

This was even before taking into account the full impact of Covid-19 on the economy.

Bankers and analysts expect impaired loans to surge, given the harsh impact the pandemic will have on the global economy. However, the moratorium will provide a stop-gap buffer for six months.

AMMB Holdings Bhd group CEO Datuk Sulaiman Mohd Tahir says the intention of the moratorium is to give individuals and businesses a temporary reprieve.

“What we are doing is to give businesses, industries and individuals the time required to find their footing, particularly from a cash flow perspective. Without the payment moratorium, the industry will likely see more non-performing loans,” he says.

“AmBank’s direct exposure is manageable. A significant portion of our clients are small and medium enterprises and this moratorium will indeed be beneficial to them. In terms of our mortgage book, a majority of our financing is for owner-occupied properties. Expectations are that defaults may rise, but since these are secured, the impact on the bank will be limited. We have also been derisking our hire purchase books for a while.”

A senior banker at another local bank says banks will be engaging their customers. “Anything we can restructure up front, we will. We will also be lending out as well, so active engagement is key.”

Maybank group president and CEO Datuk Abdul Farid Alias says, “We do not know how long it will take us and countries around the world to find a permanent solution to this pandemic situation. We are giving ourselves six months, which is a reasonable assumption. In the event that we need a longer period because the root case is still not properly remedied, we should give ourselves the opportunity to relook at this.

“In any event, banks in Malaysia have built up their balance sheets with capital and liquidity levels that are multiple times of what they were before, during previous crises. In this sense, we should be thankful for the regulations that are put in place to ensure the ability of the banking sector to withstand a crisis like this.”

Beginning April 1, local banks will offer a moratorium or postponement of repayment of up to six months to individual borrowers and SMEs. The moratorium is also for loans from TEKUN, Mara, cooperatives and government agencies that grant such facility to SMEs.

For credit cardholders facing financial constraints, they can choose to convert their credit card balance to term loans.

Credit Suisse, in a March 25 note, says the move will ease pressure on credit losses and gross impaired loans (GILs). “Overall, it helps protect banks’ earnings and, hence, dividends from excessive shocks.”

CGS-CIMB Research projects an increase in the industry’s GIL ratio from 1.52% as at end-December 2019 to 1.7% at end-December 2020, given the unfavourable economic climate amid the Covid-19 outbreak.

“We think the moratorium on consumer and SME loan repayments can help prevent a spike in GIL ratio above the 1.7% we are projecting for 2020F,” it says in a March 25 report.

The local research house expects new GILs and loan loss provisioning (LLP) to be extremely low in 2Q2020F and 3Q2020F as it thinks there will be no defaults for most consumer and SME loans due to the six-month moratorium on loan repayments.

“During this period, most banks’ new GILs and LLP will come from corporate loans and loans extended in overseas markets. Based on this, we think our projection of a 31.6% increase in 2020F LLP amid the Covid-19 outbreak is not too optimistic even with the assumption that the LLP spikes in 4Q2020F,” it adds.

Following Bank Negara Malaysia’s move to grant an automatic moratorium on loan payments for six months, a number of Malaysian banks announced last Friday that they will not compound interest and profit rates on their loans. Among the banks are HSBC Malaysia, OCBC Bank (Malaysia) Bhd, RHB Bank Bhd, Maybank, CIMB Group Holdings Bhd, Public Bank Bhd and AmBank Group.

This is to further alleviate the financial strain on their individual and SME customers.

The moratorium applies to all ringgit-denominated loans that are not in arrears for more than 90 days.

In terms of the impact on banks’ top line, bankers say it will be “manageable”, and analysts agree.

“Moreover, Islamic loans do not compound, anyway. It depends on a bank’s individual loan book — how much of it is SME and household loans as well as the percentage of loans that are given as Islamic versus [that given as] conventional,” says a banking analyst.


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