KUALA LUMPUR (May 9): This week may have been a good week for borrowers, as financial institutions agreed to waive additional charges on hire purchase (HP) loans during the six-month moratorium period, while Bank Negara Malaysia (BNM) trimmed the key interest rate further.
While these effectively help consumers lower their debt service burden, it is a double whammy to banks’ earnings.
Firstly, the waiver of additional interest or profit on deferred HP loans during the six-month moratorium period will cause banks to book in modification losses that analysts expect can reach between RM3.4 billion to RM4 billion, equivalent to 13% to 14.4% of the banking sector’s net profit in 2020. This modification loss is a one-off day one provision for the amount arising from adjusting the gross carrying amount of a financial asset to reflect the renegotiated or modified contractual cash flows.
Affin Bank Bhd is expected to be the hardest hit by this, because its proportion of HP loans is the highest among local banks, at 23.2%, followed by Public Bank Bhd with 14.5% and AMMB Holdings Bhd (AmBank) with 14.2%.
Based on estimates done by CGS-CIMB banking analysts Winson Ng, the modification for HP loans would shave off 45.7% of Affin’s net profit in 2020, while Public Bank and AmBank would see their net profit negatively impacted by 18.2% and 21.7%, respectively.
The next major blow to banks earnings is BNM’s decision to further cut the Overnight Policy Rate (OPR) by 50 basis points (bps) on Tuesday.
In less than five months, BNM has trimmed the interest rate by 100 bps, which will further compress banks’ net interest margin (NIM), the rate differentials banks earn on their floating-rate loans against their lending costs. And analysts are widely expecting a further 25 bps rate cut to occur before the year is out.
And those with significantly higher portions of floating-rate loans – the very same reason that protects banks from higher modification loss from HP loans – will be hit harder by NIM compression. Among them are RHB Bank Bhd (whose loan portfolio comprises 88.6% floating-rate loans), CIMB Group Holdings Bhd (84.6%), Alliance Bank (Malaysia) Bhd (83%) and Hong Leong Bank Bhd (81.8%).
Affin Hwang Capital banking analyst Tan Ei Leen forecast that the banking sector’s NIM will decline by 9% year-on-year (y-o-y), to 1.9% in 2020 as compared to 2.1% in the previous year.
Ng, meanwhile, said a full year 125 bps OPR cut would cause banks’ net profit to drop by about 10% y-o-y in 2020.
Nevertheless, some banking analysts, including Hong Leong Investment Bank’s Chan Jit Hoong, expect the OPR cut’s impact on banks bottom-line to be less severe this time as fixed deposit (FD) repricing could be quicker. According to him, about 80% of FDs will expire by June. And most banks saw the rate cut coming and had been proactively managing their FD levels to cut down on cost exposure, he added.
Rise of impaired loans and the risk from O&G exposure
Analysts are seeing mounting pressure on banks’ asset quality, following their offer of an automatic six-month moratorium on loan repayment to individuals and small and medium enterprise (SME) customers starting April.
They expect the loan accounts under the moratorium to be categorised as rescheduled and restructured (R&R) accounts, which then will have to be classified as impaired, hitting banks’ profits via provisions.
Overall, Ng is expecting an 11.8% y-o-y surge in the banking industry’s gross impaired loan (GIL) ratio to 1.7% in 2020, from 1.52% previously.
Similarly, Affin Hwang’s Tan expects the GIL ratio to rise faster after the moratorium period. He said the banking system GIL ratio has already crept upwards by 5.7% year to date (YTD), to 1.59% as at March.
Another rising risk is the banks’ exposure to the oil and gas sector, said Tan. If oil prices continue to stay low at US$20 to US$30 per barrel, Tan believes that cashflow of O&G players will be affected, which means the risk of defaults will increase significantly.
Currently, Malayan Banking Bhd’s (Maybank’s) loan exposure to O&G stands at 2.79%, while RHB’s is at 2.4%. CIMB’s exposure is at 2.3% via its loanbook and 3.5% of its bondbook, while AmBank has a 2% loanbook exposure and bond holdings of about RM740 million.
CIMB, in particular, made headlines in mid-April with reports that the bank had exposure amounting to some RM500 million to troubled Singapore oil trader, Hin Leong Trading Pte Ltd.
The spectre of slowing loan growth
Risks aside, growth prospects aren’t looking great in the near term either. Analysts expect a slowdown in loan growth, as dampened consumer and business sentiment will continue to take a toll on the purchase of big-ticket items and business expansion.
Both business and household loan applications have already fallen by 3.6% y-o-y and 15.9% y-o-y, respectively, in March.
Some analysts observed that even before the onset of the Covid-19 pandemic, demand for credit had been slipping domestically. This, they reckoned, might have more to do with waning confidence in domestic conditions, chief among which was a deterioration in political stability following an abrupt change in government, rather than considerations over the weak global environment.
In addition to the subdued demand for credit, loan approvals shrank 22.5% y-o-y with both business and household loans contracting 23.2% y-o-y and 21.7% y-o-y respectively, as banks become more prudent in screening customers.
Not surprisingly then, most analysts expect banks’ loan growth to contract in 2020. To Affin Hwang’s Tan, there could be a 3% y-o-y contraction for the full year.
Still, valuations now cheaper than even during the Global Financial Crisis period
Despite the grim operating outlook for banks, some analysts have called for investors to consider accumulating bank stocks that are now trading at inexpensive valuations, as prices of all banks have been bashed down, with YTD double-digit losses ranging from 14% to 33%.
In terms of price-to-book (PB) ratio, all domestic banks, other than BIMB Holdings Bhd, are currently trading at a discount compared with their respective average PB valuations during the 2008-2009 Global Financial Crisis (GFC) period.
And two that have been identified as domestic systemically important banks (D-SIBs) by Bank Negara Malaysia, namely CIMB and Public Bank, top the list in terms of trading at the steepest discount relative to the GFC period (see table). D-SIBs are essentially banks whose distress or failure has the potential to cause considerable disruption to the domestic financial system and the wider economy.
CIMB is currently trading at a discount of 65%, with its current PB ratio standing at 0.61 times, as compared to its average PB of 1.76 times during GFC. Public Bank is now at a PB ratio of 1.40 times, indicating a discount of 59% to its PB ratio of 3.39 times during the GFC.
Other banks that are trading at a more than 40% discount compared to their GFC PB includes AmBank, Malaysia Building Society Bhd and RHB Bank.
In terms of dividend yield, all domestic banks, except for Public Bank and Hong Leong Bank, currently have higher indicative dividend yields compared with during the GFC period. Topping the list is AmBank, whose indicative dividend yield of 7.22% is now 285% higher than GFC’s average of 1.87%, followed by CIMB, at 158% higher.
The indicative dividend yields, however, are based on dividends paid in the recent past, when the economic environment was more sanguine. If dividend payouts are revised in the coming quarters, the indicative dividend yield will drop accordingly.
When asked if it is now ripe to buy bank stocks, Philip Capital Management Sdn Bhd chief investment officer Ang Kok Heng said it largely depends on one’s investing time horizon.
If it is for the long-term, then the banks are worth looking at, if one is willing to implement the dollar cost averaging strategy. This means be ready to divide up the total amount to be invested across periodic purchases to reduce the impact of volatility on the overall purchase.
Ang favours Maybank for decent dividend yield, and Public Bank for prudent management of its loan accounts.
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