This article first appeared in The Edge Malaysia Weekly on July 19, 2021 - July 25, 2021

IT has been barely two weeks since the six-month loan repayment moratorium kicked off in Malaysia but early indications are that its impact will likely be less severe than the first round made available last year, both in terms of modification loss and provisions incurred, says BIMB Holdings Bhd.

BIMB fully owns Bank Islam Malaysia Bhd, the country’s largest standalone Islamic bank.

“Obviously, with the moratorium, banks will have to book in another round of modification loss. I expect that will come in the third quarter. So, that will have an impact on the bottom line of banks, but it will not be as bad as last year,” BIMB CEO Mohd Muazzam Mohamed, who also heads Bank Islam, tells The Edge.

This is mainly because unlike last year’s six-month moratorium, which was offered to individuals and small and medium enterprises (SMEs) on a blanket basis, the latest form of assistance to borrowers is on an opt-in basis. This means that borrowers need to apply for it. Nevertheless, its eligibility is made a lot easier than the targeted repayment assistance (TRA) that banks introduced last October, hence, there are higher applications for it than the TRA.

“So this form of new assistance comes in somewhere in between (in terms of severity of impact to the bank). What we find is that many people who are not affected (by the Covid-19 pandemic) choose not to apply,” Muazzam explains.

Applications for the new form of assistance began pouring in from July 7. Bank Islam is one of the first lenders to make public the number of applications it has approved.

Calling it the Pemulih repayment assistance (PRA), Bank Islam allows eligible customers to choose either a six-month moratorium on monthly payments or a 50% reduction in instalments for six months.

According to Muazzam, as of July 13, Bank Islam had approved 112,536 PRA applications from retail customers, involving financing of about RM14.5 billion, and around 90 applications from microenterprises and SMEs, involving financing of RM140 million.

The total financing under PRA is about 26% of the bank’s total financing as of June this year, he adds.

Based on total applications approved, 97% opted for the moratorium, while the remaining 3% opted for the 50% instalment reduction.

“Currently, the majority of the applications comes from individuals,” he says.

Given that it is still early days, it can be expected that there will be more applications coming. “Based on the run rate of applications in the past one week since the PRA was made available, Bank Islam expects that less than 50% of applicable accounts will seek a moratorium. At present, one-third has applied,” Muazzam shares.

Asked what this would mean in terms of Bank Islam’s modification loss this year, he says: “This should translate to an estimated exposure of around half of FY2020’s modification loss incurred.” Last year, its total modification loss stood at RM136.38 million.

BIMB’s net profit fell 8.5% to RM720.25 million in FY2020, hurt by the recognition of the modification loss from the moratorium exercise and TRA programme, and from having made substantial pre-emptive impairment provisions given the challenging economic environment. Total net impairment provisions on financing jumped to RM208.67 million from RM83.69 million in 2019.

Given the prolonged national lockdown this year as a result of heightened Covid-19 cases, as well as the PRA, investors are wondering if impairment provisions, including pre-emptive ones, may end up being as hefty as last year.

For now, Muazzam does not expect this to be so, given that the group made substantial pre-emptive provisions in the second half of last year.

“The pre-emptive provisions that we put in [last year] was on the generous side, so, to a certain extent, it could also cover for the scenario that we are seeing this year.

“Having said that, we are still running our simulations based on the new scenario. But what I can say is … the initial assessment is that it is not going to be another round of hefty pre-emptive provisioning that we need to add on,” he says.

BIMB has given analysts a credit cost guidance of 30 to 35 basis points for this year.

All eyes will also be watching BIMB’s net financing margin (NFM) this year. In late May, the group had guided that NFM may come in at a lower level of 2.2% this year after 2.39% last year, attributing its conservative guidance to economic uncertainties.

Analysts were downbeat on this, considering that most banks are expected to see a margin expansion this year, having recovered from the impact of multiple cuts in the overnight policy rate last year.

“We think any decline in BIMB’s NFM in FY2021 stems from the bank competing on lending rates to sustain its high loan growth — we project it at 5.8% versus the industry’s 2% to 3%. BIMB may also have to offer higher fixed deposit rates to attract more deposits to fund its loan growth,” CGS-CIMB Research said in a May 31 report.

BIMB has said that it is aiming for financing growth of 7% to 8% this year, after strong growth of 10.5% last year.

Meanwhile, Muazzam says the group’s restructuring exercise, which will ultimately result in Bank Islam taking over BIMB’s Main Market listing status, is on track for completion by end-September.

“We still expect to complete everything by end of September, if not, early October,” he says.

BIMB derives the bulk of its earnings from Bank Islam. It also has a 59.45% stake in Syarikat Takaful Malaysia Keluarga Bhd (STMK).

Post-restructuring, STMK will retain its separate listing status. Bank Islam will become the region’s first pure-play full-fledged Islamic financial institution.

Most research houses that track BIMB, including CGS-CIMB, currently have a “buy” recommendation on it. Kenanga Research, in a report last week after getting updates about the lender, said it was maintaining its “outperform” and RM5.10 target price on BIMB as it was confident about the bank’s medium-term sustainability.

It sees BIMB’s net profit this year growing 6.7% to RM768 million. As at 1QFY2021, net profit fell 3.2% year on year to RM202.46 million on lower net income, in line with analysts’ expectations.

“We like BIMB’s existing proposition, where as a standalone bank, it helms solid performance in terms of asset quality and growth targets while registering commendable return on equity. At the moment, the bank is still paying less than its desired 50% payout ratio (we applied at 35% payout) but could pay such levels when macro risks ease,” Kenanga Research says.

The stock, which has gained 8% over the last 12 months, closed at RM3.75 last Thursday, giving the company a market capitalisation of RM7.76 billion.

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