KUALA LUMPUR (Sept 15): The move by the Ministry of Finance (MOF) instructing banking institutions to work on the exemption of interest payments for recipients of the targeted payment assistance has generally taken analysts by surprise.
Notably, the exemption of interest payments will only involve the recipients of the moratorium from the bottom 50% group in terms of income classification for a period of three months from October to December 2021. Undoubtedly, this will impact the banks' interest income trends in the fourth quarter of 2021 (4Q21).
However, most analysts opine that the impact on banks from this newest development is manageable.
This is because B40 retail loans only make up around 10% of the total commercial banking system loan base, said UOB Kay Hian Research in a report, adding that only 30% have opted in for the existing loan moratorium.
"As such, assuming that there is no further increase in B40 loan moratorium, only 3% of total commercial banking system loans will be impacted by this interest waiver over a three-month period (in 4Q21)," said the research house.
UOB Kay Hian Research further said that the overall impact of this interest waiver will be relatively manageable for the banks, given the relatively low composition of low-income loan customers with the commercial banks, coupled with the short three-month period of interest exemption.
Meanwhile, MIDF Research sees the impact on the banks as a result of this exemption of interest payments for the bottom 50% segment to be insignificant.
MIDF Research reasoned that the loan amount will be comparatively lesser from other income group segments due to income constraints of those in the bottom 50% income group.
"On that note, we can assume that the B50 segment (as highlighted by MOF's statement — we presume it includes B40 and lower M40) will not be any significantly higher. Based on Bank Negara Malaysia's Financial Stability Review, Second Half 2020, borrowers with income of up to RM5,000 contribute to 37.9% of total household debt," highlighted the research house.
That said, there is still much ambiguity surrounding this issue.
RHB Research pointed out that the sparse details have made it difficult to make a reasonable assessment of the impact.
For one, it said that the MOF has not defined what constitutes the "bottom 50" group.
It also shared that from its conversations with various management teams, the decision by MOF has also surprised the banks.
"It is still unclear how wide the scope is, with issues likely covering the inclusion of mortgages and small and medium enterprises, as well as the composition of B50 borrowers, among others," it said.
RHB Research believes that if the waiver of interest includes mortgages and banks receive no assistance from Bank Negara Malaysia, it could potentially worsen the impact on banks. It sees risks of significant modification losses given the much larger ticket size of mortgages, reminding that mortgages make up 36% of system loans compared with 9% for hire purchase and 5% for personal loans.
"In addition, we may see a new wave of applicants, driven mostly by opportunistic borrowers taking advantage of the waiver," it further added.
The research house sees close to RM2.3 billion impact, on the assumption that those who earn RM5,000 per month or less are classified as B50 and where all B50 borrowers apply for the interest free moratorium.
"Assuming full impact is taken in 4Q21, we are potentially looking at a steep decline in sector profitability," said the research house, who is estimating a 9% impact on sector earnings.
On the other hand, UOB Kay Hian Research estimated the potential 2021 sector earnings impact to come in at 2.2% from the three-month interest exemption for all B50 loans currently under the loan moratorium.
Adding the expected modification loss of 1% to 1.5% for 2021 earnings, it sees the sector earnings being impacted by only 3.7%.
Under UOB Kay Hian Research's worst case scenario, in which all B50 are to opt in for the moratorium for the interest exemption, it sees a total impact of 8.6%, which includes modification losses. This is also manageable in its view.
As for MIDF Research, it said that the impact on earnings for banks under its coverage will only be 3.1%, under the situation where there is no change in the percentage of loans under the existing moratorium.
At 10.59am, most banking stocks were higher than their previous day’s close. AMMB Holdings Bhd took the lead with 0.96% gain to RM3.16, followed by Hong Leong Bank Bhd (0.65% to RM18.58), RHB Bank Bhd (0.56% to RM5.38) and CIMB Group Holdings Bhd (0.21% to RM4.79).
Alliance Bank Malaysia Bhd, Affin Bank Bhd, Public Bank Bhd remained unchanged at RM2.53, RM1.70 and RM4 respectively.
Malayan Banking Bhd was unchanged at RM8.29, while BIMB Holdings Bhd shed 0.25% to RM3.97.