Interest waiver, windfall tax concerns jolt investors

Interest waiver, windfall tax concerns jolt investors
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KUALA LUMPUR (Sept 14): The news that Putrajaya is seeking to facilitate interest payment exemption for those who opt for loan moratorium is pleasant to the man in the street. It did not go down well in the stock market, however.

Adding to the concerns is that the government could be mulling the imposition of windfall tax.

There was a mention of a second reading of the Windfall Profit Levy (Amendment) Bill 2020 in the Parliament Order Paper published on Tuesday. And that has frightened the corporate world and investing fraternity. The bill's first reading was conducted in December 2020.

Selling pressure mounted on Bursa Malaysia after Tuesday's lunch break.

The FBM KLCI dropped to an intraday low of 1,548.89 points before it closed at 1,555.51, down 14.62 points or 1.35%.  Among the component stocks, Press Metal Aluminium Holdings Bhd was leading the fall. The stock lost nearly 4% or 23 sen to close at RM5.58, after earlier sliding to RM5.44.

Banking counters, glove makers and plantation stocks were also the selling targets.

Across Bursa Malaysia, market breadth was largely negative with 715 decliners against 339 gainers. In terms of year-to-date performance, the FBM KLCI is among the handful which are in the negative zone (see table).

Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz announced that the ministry has instructed banks to immediately work on the exemption from interest payments for recipients of bank loan moratorium for the fourth quarter of 2021. The interest waiver is only applicable to those from the bottom 50% income bracket.

The interest payment exemption will help lighten the household burdens on borrowers as well as provide a temporary boost to consumer spending. However, these are at the expense of others.

"Interest waiver potentially only affects certain segments of borrowers which may help that specific segment, but at the expense of Bursa-listed companies like banks and their investors.

"(As such,) the market is very sensitive to new policies and measures... where this may push away investors typically foreign investors like what China is experiencing now (after the crackdown on home-grown technology companies)," Areca Capital Sdn Bhd chief executive officer Danny Wong said when contacted.

In the recently concluded results season for the financial quarter ended June 30, 2021, banks achieved impressive earnings growth thanks to sharply lower loan loss provision against last year and the absence of modification loss.

Prior to the latest announcement on interest-free moratorium, CGS-CIMB Research projected that Malaysia's banking sector earnings would grow 2.9% in 2021 when factoring in maximum modification loss due to the automatic loan moratorium this year.

However, MIDF Research head Imran Yassin Md Yusof pointed out that the negative impact of the interest waiver on banks may be less than what is perceived by the market.

"It should be noted that the waiver is for those taking the loan moratorium, for the bottom 50% income bracket and only for the last three months of the year.

"Therefore, the impact to banks' interest income may be marginal comparative to its full-year interest income. We might see further pressure on banking stocks until we get a much clearer picture on the announcement, when investors can assess the impact to banks," Imran said.

That said, some banking analysts do not see last year's scenario as being able to set the bearing of the current year's situation, simply because people could be in deeper financial troubles given the prolonged pandemic that has lasted over a year. Furthermore, banks would have to book in modification loss in the second half of the year due to the current six-month loan moratorium.

"The impact of the interest waiver on banks' earnings is likely to be significant... long-term ramifications are more worrying, for instance waning foreign interest, higher credit costs," said a banking analyst.

Unwelcomed windfall tax

Concerns over the introduction of windfall tax subsided after Tengku Zafrul told Dewan Rakyat in July that any sudden implementation of such a tax could send the wrong signal to investors.

Nonetheless, the planned second reading of the bill has unnerved the corporate world, against the backdrop of a government seen in dire need for more public revenue to fund its stimulus measures.

The often talked-about sector is the rubber glove industry, which has seen earnings grow up to 15 times when the pandemic struck the hardest, driven by abnormally strong demand and subsequently higher average selling prices in the period.

Last year, the glove makers did not pay windfall tax. Instead they donated a combined RM400 million to the government to support the battle against Covid-19.

Other sectors which have seen improved earnings in this pandemic season include metal manufacturers and plastic part manufacturers.

Among the KLCI component stocks, Press Metal Aluminium also booked a strong quarterly performance recently, as aluminium price surged to a 13-year high. The counter peaked to its all-time high of RM5.81 last Tuesday.

An analyst commented that semiconductor manufacturers and those in the electrical and electronic (E&E) segment which have seen superprofits recently, thanks to booming demand for electronics as a result of the global work-from-home practice, may not be targets of the windfall tax.

"Maybe not [E&E]," The analysts said. "The tech sector is one industry where the government is encouraging more FDI (foreign direct investment) through tax benefits. Windfall tax on these companies will be counterproductive," the analyst added.

Bursa Malaysia's Technology index was the only sectoral gainer on Tuesday, closing a marginal 0.8% higher.

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Kathy Fong