This article first appeared in The Edge Malaysia Weekly on September 20, 2021 - September 26, 2021

THE move to exempt troubled B50 borrowers from making interest payments for three months, while an unexpected setback for banks, is manageable, say analysts, who still expect the sector to see earnings growth this year.

However, some of them voice caution as there are still many uncertainties.

“The impact is manageable, but investors are also wondering what might come next. Will three months [of interest waiver] become six months? Will the waiver also be extended to SMEs (small and medium enterprises) next? Investors are speculating about these and there are a lot of uncertainties,” a banking analyst tells The Edge.

He was referring to news reports last week of former finance minister Lim Guan Eng lobbying for SMEs to also be given the same interest payment waiver as the B50 (the bottom 50% of income earners) segment.

The analyst points out that should the uncertainties continue, banks’ dividend payments may be affected, which would disappoint investors given that last year, most banks did not pay interim dividends because they wanted to conserve capital amid uncertainties from the Covid-19 outbreak.

“My opinion, though, is that banks will pay dividends this year, albeit at a more scaled down level, or they may do more dividend reinvestments,” the analyst opines.

Despite the uncertainties, most analysts continue to maintain a positive investment stance on the sector.

Last Tuesday, the Ministry of Finance (MoF) sprang a surprise when it instructed banks to waive interest on loans under moratorium for borrowers in the B50 segment for three months from October to December 2021.

“From our conversations with various [bank] management teams, it appears that MoF’s decision was a surprise to them. It is still unclear how wide the scope is,” said RHB Research in a report the day after the announcement. It is understood that banks are still trying to work out the details, including who exactly falls under “B50”.

The current moratorium, which started on July 7 under the government’s Pemulih programme, is for six months and banks had been allowed to accrue simple interest on the loans.

“However, this latest announcement by the MoF means that banks will now have to forego three months of simple interest on all retail loans for lower-income borrowers that have opted in for the loan moratorium. This will impact banks’ 4Q2021 interest income trends,” UOB Kay Hian Research said in a report.

Maybank Investment Bank Research said it expects the modification loss from this year’s opt-in moratorium to be larger than initially expected, given that the interest waiver seems to be across all B50 consumer loans and not just to hire purchase/fixed rate loans as it was during last year’s six-month loan moratorium.

“It is not clear what the income bracket is for the B50 group but for reference purposes, loans to retail borrowers earning less than RM5,000/month make up on average 35% of total consumer loans and 20% of total group loans for the banks in our coverage.”

Maybank IB Research estimates this year’s total modification loss to come in at about RM1.42 billion for the banks in its coverage, versus RM1.35 billion in 2020.

“We estimate an average 7% impact to earnings this year as a result. A point to note is that the modification loss is one-off in nature and it will be clawed back in future years, over the life of the loans. There is ample liquidity in the system and the banks are well capitalised. We expect earnings to rebound in 2022 in the absence of such mod losses.”

RHB Research sees two factors that could potentially worsen the impact for banks — the inclusion of mortgages in the interest waiver and no assistance from Bank Negara Malaysia. Recall that last year, Bank Negara provided funding assistance through its Special Relief Funds, which helped banks offset some of the impact of modification losses.

Its back-of-the-envelope estimate is that the latest development will result in a 9% impact on sector earnings this year. “We estimate close to a RM2.3 billion impact, assuming those who earn less than or RM5,000/month are classified as B50. Our estimate points to the maximum impact, that is, all B50 borrowers applying for the interest-free moratorium.”

Despite the latest development, most analysts expect banking sector earnings to grow this year, albeit less robustly than initially expected, following last year’s more muted earnings because of high credit costs and modification losses.

“Based on our simulation, we estimate this [development] would reduce banks’ 2021 net profit by 5%, with the impact ranging from 3.9% for Malayan Banking Bhd to circa 9% for Alliance Bank Malaysia Bhd and Affin Bank Bhd. This could lower our projected net profit growth for banks in 2021 (excluding one-off items from AMMB Holdings Bhd) from 15.8% currently to 10%. As we treat this as a one-off item, it would not impact our projected core net profit growth,” CGS-CIMB Research noted in a Sept 15 report. It is projecting a core net profit growth of 9.4% this year for the banks under its coverage, followed by a 7.3% expansion in 2022.

The Bursa Malaysia Financial Services Index has gained 20.1% over the last 12 months to 15,289.80 as at last Friday, outpacing the benchmark FBM KLCI’s 2.34% gain over the same period.

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