This article first appeared in The Edge Malaysia Weekly on July 18, 2022 - July 24, 2022

THE Bank of Nova Scotia Bhd (Scotiabank) has sold RM40 million of its non-performing retail loans (NPLs) to an external party, sources say, in what is understood to be the first NPL transaction involving a bank in Malaysia since 2020.

Unlike their peers in Southeast Asia, banks in Malaysia rarely sell NPLs.

Selling NPLs is one way for banks to resolve bad debt quickly so that they can focus on growing their business. In Scotiabank’s case, however, the bank is in the process of winding down its operations in Malaysia.

Back in January, citing sources familiar with the matter, The Edge had reported that Scotiabank would exit Malaysia before the end of this year, putting an end to its 49-year history in the country. The low-key bank is wholly owned by Canada’s third-largest lender by assets, Bank of Nova Scotia.

According to its unaudited financial statements for the second quarter of the financial year ending Oct 31, 2022, Scotiabank had RM6.05 million net impaired loans and advances as at April 30, compared with RM43.94 million on Oct 31 last year.

“The bank entered into an asset sale agreement with an external party for the disposal of [its] non-performing retail loan portfolio during the financial quarter. Subsequent to the period ended April 30, the conditions precedent of the agreement had been fulfilled and the sale was executed in May 2022. No material financial impact arose from this sale,” it said.

It is understood that the buyer of Scotiabank’s NPLs is Collectius CMS (M) Sdn Bhd. Collectius CMS is part of the Singapore-based Collectius group, a leading NPL-acquiring firm in Southeast Asia.

“We concluded an NPL transaction with a global bank in Malaysia amounting to RM40 million of secured consumer portfolio (loans with collateral) in the first half of this year,” Collectius CMS’ managing director Leong Yam Meng tells The Edge, adding that the process was endorsed by Bank Negara Malaysia.

He, however, declines to reveal the name of the bank, citing client confidentiality. Nevertheless, several industry sources have confirmed that it is Scotiabank.

While NPL transactions involving banks have been few and far between in Malaysia, Thailand is the busiest market in the SEA region and has many large foreign buyers.

Last month, the Collectius group acquired more than US$800 million of NPLs from a commercial bank in Vietnam, where loan defaults are becoming more common due to the impact of the Covid-19 pandemic.

Considering that banks in Malaysia have phased out pandemic-related payment relief assistance on June 30, are there likely to be more NPL sales to come? Leong believes there may be some traction “after the fourth quarter” once lenders have a clearer picture of their NPL position.

“With the [loan repayment] moratorium for commercial loans having ended in June, we think debt levels will rise as businesses may take on more loans to finance earlier ones. Given rising interest rates and a recessionary environment on the horizon, we expect to see more loan defaults. Banks would start to have a clearer picture of their NPL position in the coming months, so we believe that this is a space to watch,” he says.

As for consumer loans, he says a lot depends on the government’s policies in terms of additional loan repayment support measures, as well as the appetite that banks have to take on new customers, especially with digital banks coming onto the scene soon, which will change the competitive landscape for the country’s banking sector.

“We think that after the fourth quarter this year, NPL-sale activity will have some traction because those banks that had plans to execute debt sales before the pandemic will start to get their board to review the approval of the debt sales. With a lot of uncertainty ahead, it will be a good time for them to dispose of these NPLs to get cash in hand,” Leong opines.

“The commercial side is also a place to watch, being a segment where they have been struggling to collect back their dues since the pandemic,” he adds.

Over the last five years, Collectius CMS has acquired a total of RM700 million worth of NPLs in Malaysia from banks and non-banks. Its most recent one was the transaction with Scotiabank.

Leong indicates that there may be opportunities for NPL transactions even for other types of lenders. He points out that the “fabric” of the debt market in Malaysia is much different today than what it was five years ago.

“People are borrowing not just from traditional banks, but [also from] many other places. The acceleration of digitalisation has introduced a host of platforms offering direct loans to consumers,” he says, pointing to examples such as buy-now-pay-later players, telecommunications companies, auto finance companies and peer-to-peer lending platforms.

“In that regard, Malaysians today have more avenues to access credit for discretionary expenses and, given the lower penalties faced for defaulting on these loans, more loan delinquencies can be expected with economic headwinds approaching,” he says.

Additionally, digital banks are set to be launched in Malaysia within two years. They will focus on the “unbanked” segments of society, which are considered higher risk, as the customers typically have no payment-pattern record or stable income, Leong points out.

“They still deserve to be eligible to access credit and it depends a lot on the risk appetite of the new digital banks. Nonetheless, it does make access to credit more convenient, which is a game changer for the lending market. This is an opportunity for Collectius to work hand in hand with digital banks and provide our support on debt management,” he says.

The last NPL sale in Malaysia was by CIMB Group Holdings Bhd in 2020, the value of which is unknown. Prior to that, the last known one was by AMMB Holdings Bhd (RM553.91 million) in early 2019.

Between 2005 and mid-2012, NPLs sold by banks amounted to less than RM3 billion, according to past data by Bank Negara.

Analysts say one of the reasons NPL sales as a bad debt resolution channel has not been popular in Malaysia in the past decade is because the banking sector’s asset quality has been on a consistent recovery since the 1997/98 Asian financial crisis. Hence, the overall size of the Malaysian NPL market — at a yearly average of RM25 billion to RM30 billion over the 10 years prior to Covid-19 — is not large. Most banks tend to deal with NPLs in-house.

Another possible reason is that under current banking regulations, banks can only sell NPLs to companies that are at least 51%-owned by domestic shareholders. The purchasing companies are subject to a foreign equity cap of 49%, which limits the participation of foreign players.

Nevertheless, in its Financial Sector Blueprint 2022-2026 released in January, Bank Negara said it plans to remove the foreign equity cap in order to attract greater participation, particularly from established international players, in the market.

“With a more diverse buyer market, banks will be able to manage impaired financing in a more efficient manner,” the central bank said.

It is understood that talks among the relevant parties on this matter are still ongoing.

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