Banks risk modification loss by waiving additional HP interest ⁠— analysts

-A +A

KUALA LUMPUR (May 8): The decision not to charge additional interest on hire purchase (HP) instalments is positive for consumers but it comes at a cost to banks, which may have to make a one-off provision for the interest that they cannot collect, Maybank Investment Bank (Maybank IB) said.

“That banks not being able to collect additional interest on HP instalments over the six-month period will lead to a one-off Day 1 provision for what is known as a modification loss under MFRS 9 (Malaysian Financial Reporting Standard 9). This loss relates to the opportunity cost over time from not having received the additional cash flow. By our estimates, the modification loss for the banking industry as a whole works out to be about RM4.4 billion,” Maybank IB said in a note yesterday.

Meanwhile, CGS-CIMB estimated that the modification loss would reduce banks’ financial year 2020 (FY20) net profit by 14.4%.

“The banks that we have contacted so far have been unable to provide guidance on the financial impact of this development. However, we understand they are in discussions with the regulator, auditors and accounting bodies on how best to handle the issue in a bid to minimise related losses. As such, there is no clarity yet of the actual impact which we will factor into our earnings forecasts once we receive the guidance from banks,” CGS-CIMB said in a report yesterday.

On Wednesday, the Ministry of Finance (MoF) confirmed that banks had agreed to waive the additional interest or profit charge imposed on instalments for HP loans for the six-month moratorium period, following the government’s call for the industry to waive the additional charges.

This means the amount of monthly instalment payments will not change for HP (conventional and syariah-compliant) borrowers throughout the financing period, and there will be no additional charge imposed during the moratorium period, the ministry confirmed.

“In the worst-case scenario, we think the hardest-hit could be AMMB Holdings Bhd, Public Bank Bhd and Hong Leong Bank Bhd, with BIMB Holdings Bhd and Alliance Bank Malaysia Bhd being the least affected. We do, however, stress that this would be just a one-off accounting impact on financials. We are 'neutral' on the sector with 'buys' on RHB Bank Bhd and BIMB,” Maybank IB said.

Based on CGS-CIMB’s estimates, Affin Bank Bhd would be the bank most impacted in its coverage universe by the modification loss, with its FY20 net profit forecast lowered by 45.7%.

“This is because its proportion of HP loans of 23.2% at end-December 2019 was the highest in the sector. The impact would be smallest at 4.2% for Alliance Bank’s FY3/21F net profit (forecast for the financial year ending March 31, 2021) as its proportion of HP loans was the lowest in the sector at only 1.9% at end-December 2019,” CGS-CIMB said.

AmInvestment Bank said banks’ interest income will recover from the fourth quarter of this year onwards when cash flows are received through borrowers’ instalment payments after the moratorium period.

“A significant portion of the modification losses is expected to be gradually reversed out as the HP loans progress through the remaining tenors. The pace of the recovery or reversal of the losses will be dependent on the balance of the loan tenors. A three-year HP loan will have a faster recovery compared with loans with five years of remaining tenors. Also, it will depend on banks’ HP loans’ effective interest rates. Lower rates will result in lower modification losses. Generally, the average HP tenor and effective interest rate are around four to five years and 4%–5% respectively,” AmInvestment Bank said in a note.

See also:
One-off impact for banks given no additional interest on hire-purchase instalments — Maybank IB