This article first appeared in The Edge Malaysia Weekly on June 29, 2020 - July 5, 2020

LAST Thursday, Malaysia Building Society Bhd (MBSB) reported a first-quarter net loss of RM73.25 million owing to higher provisions for potential loan losses. It is the first local banking group to report a quarterly loss since the Covid-19 onslaught.

The development has raised concern among some as to whether more banks, especially the smaller ones, may be headed the same route.

Analysts whom The Edge spoke to, however, do not think this will be the case. While banks are expected to make higher provisions, particularly after the six-month loan moratorium ends in September, this will likely result in lower earnings rather than losses, they say.

“The reality is that a lot of them could [fall into a loss], but it all depends on how they manage their provision levels. I think they can [manage it]. At the end of the day, we’re still in the loan moratorium period, so technically, they can space out their provisions because they don’t have a good picture yet of what the [stress levels of their borrowers] are like till towards the end of the moratorium. Banks are already guiding for high loan loss provisions this year. So, now, it’s a question of whether it ends up being more than what was anticipated,” a senior banking analyst remarks.

Of the major banking groups, only AMMB Holdings Bhd has yet to report its financial results for the January-to-March quarter. All eyes are now on the banks’ second-quarter financial results, though the worry is mainly for the final quarter, post-moratorium.

In the case of MBSB, its president and CEO Datuk Seri Ahmad Zaini Othman says it was the group’s property segment, rather than personal financing, that was the main problem. Despite a year-on-year improvement in first-quarter revenue of 1.95% to RM741.41 million, it recorded a net loss of RM73.25 million compared with a net profit of RM83.83 million in the same period a year ago.

Its net allowance for impairment charges almost doubled to RM291.78 million from RM153.02 million.

“What hit us was the property and construction financing, on the corporate side. In March, a lot of people already knew bad times were coming, so they stopped buying properties. So now, a lot of these developers are having cash flow problems because of no sales. And when there are no sales, there’s also no end-financing [opportunities] for us. So, it’s a chain reaction. If you put all of these together, because of the vulnerability of that particular segment, you need to make the credit losses provisioning, so we got hit,” Ahmad Zaini tells The Edge, when asked about the losses.

He says it took a toll on the group as, unlike most banks, MBSB has a relatively smaller revenue base.

“We are just two years old as a bank and we’re still in the midst of building up our revenue streams. Our revenue base is principally [made up of] personal financing, some corporate financing and, of course, mortgages. So, with high expected credit losses (ECL) and all, we ended up posting a loss,” he adds. Property financing accounted for 15.2% (RM5.73 billion) of the group’s RM35.42 billion total gross financing.

This is the first time in a long time any of the public-listed banking groups has posted a quarterly loss. According to an analyst, the last time was probably in 2006, when BIMB Holdings Bhd posted a net loss of RM1.1 billion in the March-to-June quarter — following several quarters of losses — due to bad credit management in the past that resulted in high non-performing loans. BIMB owns Bank Islam Malaysia Bhd.

In a June 18 report, AmInvestment Bank Research notes that in 1Q2020, provisions for loan impairments for the six banking groups that had reported earnings at that point — Malayan Banking Bhd, CIMB Group Holdings Bhd, Public Bank Bhd, RHB Bank Bhd, Hong Leong Bank Bhd and BIMB — rose by 115.4% quarter on quarter, or RM1.23 billion.

“[This was] largely due to: (i) the increase in pre-emptive provisioning by most banks for the impact of Covid-19. Banks have factored in the weaker macroeconomic data, resulting in higher ECL, and hence the need for increase in provisions; and (ii) higher provisions of CIMB contributed by the full provision of RM430 million for the default of loans extended to an oil trader in Singapore,” it says.

Last Thursday, Alliance Bank Malaysia Bhd said net profit for its fourth quarter ended March 31 fell 12.3% y-o-y to RM98.06 million due to higher allowance for ECL on loans of RM98.29 million compared with RM39.92 million before. This was despite a 7.7% increase in revenue to RM432.41 million.

In a June 23 report, CGS-CIMB Research says it is now projecting a 72% y-o-y surge in provisions this year for the banks under its coverage. There could be a risk of banks’ loan loss provisions staying elevated in 2021 as their gross impaired loan ratio could spike in 4Q2020 with the conclusion of the loan moratorium period.

Moody’s Investors Service shares the view. “We expect an increase in problem loans after the lifting of the moratoriums; however, the magnitude of the increase is difficult to assess at this stage. Based on our analysis, most rated banks in the Asean-5 [Malaysia, the Philippines, Indonesia, Vietnam and Thailand] can weather at least a doubling of problem loans, provided that the credit provisions are spread over two to three years. In such a scenario, regulators would likely allow a gradual build-up of provisions or relax capital norms, or both,” it says in a June 25 report on the Asean region.

It notes that, within the region, Malaysia makes the most extensive use of debt moratoriums. On the one hand, debt moratoriums help avoid a negative scenario in which banks have a high level of problem loans in a short period of time and low recovery rates on repossessed collateral. “[But] at the same time, extensive moratoriums — particularly automatic ones — prohibit banks from dealing with problem borrowers at an early stage, [which is] a credit negative,” says Moody’s.

It adds that more than 70% of the Malaysian banking system loans as of the end of 2019 will fall under the moratorium.

The loan moratorium will avert a rapid deterioration of banks’ asset quality in the near term, Moody’s vice-president and senior credit officer for financial groups in Asia, Alka Anbarasu, tells The Edge in an interview. Given that Malaysian banks can also restructure and reschedule loans until the end of this year without classifying them as impaired, a deterioration of asset quality will likely become more evident only from 2021, she says.

CGS-CIMB sees Public Bank as being the most defensive against a rise in provisions.

“Given the economic headwinds from the Covid-19 pandemic, we are favouring banks that are more defensive against a rise in loan loss provisioning. We see Public Bank as the best positioned for this, substantiated by the results from our stress tests. Public Bank is also guiding for maximum credit charge-off rate of 15 basis points in FY2020, one of the lowest among its peers.”

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