This article first appeared in The Edge Malaysia Weekly, on December 14 - 20, 2015.

WHILE weaker loan growth is disturbing for bankers, they also have to deal with asset quality as the non-performing loan (NPL) ratio creeps up.

Indeed, banks have started to take pre-emptive measures as evidenced by the rise in provisions for impairment loss in their financial figures for the quarter ended Sept 30, 2015.

According to Bank Negara Malaysia’s statistics, total non-performing and impaired loans increased to RM22.79 billion in October this year from RM22.16 billion as at Dec 31, 2014.

When contacted, CIMB Group Holdings Bhd acknowledges that banks are more cautious about asset and liability growth targets against the backdrop of lower economic growth expectations, weaker ringgit, decrease in consumer spending and inflationary effects, although a 2.8% increase in NPLs and impaired loans is relatively “benign”.

CIMB’s gross impaired loans, advances and financing increased to RM10.17 billion as at Sept 30, 2015, from RM8.18 billion as at Dec 31, 2014. The gross impaired loans to gross loans, advances and financing ratio climbed to 3.42% in September 2015 from 3.09% in December 2014.

CIMB notes that the increase in its impairment loss was largely due to higher provisions for coal-related corporate loans in Indonesia. Interestingly, in Malaysia, this actually declined 1.3% between December 2014 and September 2015.

“The group made significant upgrades in risk management policies and credit controls in the past two years and is better positioned to keep asset quality in check. However, any improvement will depend on the economic and operating conditions in each country and the region,” it says in a written reply.

The net impaired loans, advances and financing of Malayan Banking Bhd (Maybank), the country’s largest bank, climbed nearly 25% to RM5.29 billion at end-September 2015 from RM4.24 billion at end-December 2014. In the same period, the net impaired loans to net loans, advances and financing ratio rose to 1.14% from 1.04%.

Over at AMMB Holdings Bhd, the gross impaired loan ratio went up to 2% as at end-September 2015 from 1.8% in March 2015. Impaired loans, advances and financing grew to RM1.696 billion from RM1.57 billion in the same period.

The net impaired loans, advances and financing of Alliance Financial Group Bhd (AFG), the country’s smallest banking group, rose to RM263.6 million in September 2015 from RM221.9 million in March 2015. Gross impaired loans as a percentage of gross loans, advances and financing inched up to 1.1% from 1% in the same period.

Mortgages, consumer loans the key concerns

Bankers tell The Edge that they are beginning to notice some stress in the loan accounts of property buyers who have multiple mortgages.

“The delivery of properties acquired during the sales peak of 2011/12 has begun and buyers have to start servicing their loans,” says a bank’s head of corporate strategy, adding that pressure is mounting on those with multiple mortgages and who had acquired properties under the developer interest bearing scheme (DIBS). “Some are unable to service the loans now.”

According to National Property Information Centre data, property sales peaked in 2012, which was also when DIBS came into effect.

Meanwhile, AllianceDBS Research says the gradual increase in the NPL ratio is not alarming yet. “The NPL ratio has stayed relatively stable, although it has increased for some banks. But slower loan growth distorts the ratio. We believe credit costs (provisions for NPLs/gross loans) are a better gauge of asset quality.”

The research house explains that the credit cycle has been benign for some years now, so credit costs have been trending downwards. Loan recovery, and in turn lower provisions, has also been helping most banks keep their credit costs low. “But loan recovery is tapering off and we should look towards increased or normalised credit costs.”

It adds: “This year should see credit costs escalate, led largely by CIMB. Excluding CIMB, we see credit costs rising steadily from 2014 to our 2016F estimate. We don’t expect credit costs to improve until and unless the macro fundamentals become more favourable.”

AllianceDBS also observes that according to Bank Negara statistics, the non-residential property segment saw the biggest year-on-year jump of 42% in NPLs in absolute terms. “Also, credit card non-performing loans ticked up three months ago. Construction was on an upward trend a couple of months ago but it has since moderated. We can’t ascertain the status of the oil and gas and commodity segments but we are aware that the banks are monitoring them.”

A banking analyst with a foreign research house says the overall asset quality of the banking system is intact, although there are some early signs of weakness in certain loan segments, such as property, personal and credit cards.

Credit Suisse in a September research report states: “We believe that should the current situation of depressed commodity prices and weak currency (that is if the ringgit dips below 4.2 against the US dollar) persist for another three to six months, combined with the possibility of a slowdown in economic growth, the impaired loan ratio and credit costs would start to rise.

“The change in ruling on restructured and rescheduled loans, effective April 1, 2015 (which requires banks to immediately recognise rescheduled and restructured loans as impaired loans), could hasten the deterioration in asset quality and lead to a surge in provisions.”

The foreign research house opines that the risk of a spike in credit costs poses the biggest threat to banks’ earnings. “So far, only banks with material exposure to regional markets (for example, Singapore, Indonesia and Thailand), such as CIMB and Maybank, have suffered asset quality deterioration in their overseas portfolios. Banks have yet to experience deterioration in the quality of their domestic assets and hence have not factored in high delinquency rates for their local assets in their earnings and credit cost guidance.”

Credit Suisse also says that volatility, leading to a correction in commodity prices and the currency, tends to cause a spike in credit costs for banks. “Thus, we believe there is a lot of upside risk to the current gross impaired loan ratio of 1.6% [compared with 3.7% to 12.8% in past crises] and credit cost average of 23bps (compared with 77bps to 319bps in the past crises).”

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.