This article first appeared in Corporate, The Edge Malaysia Weekly, on April 25 - May 1, 2016.

THREE banking groups, including the country’s largest bank, registered lower loan loss coverage ratios in the final quarter last year. However, two of the banks tell The Edge that they have adequately provided for any potential loan loss and are actively monitoring the asset quality of their loans.

Malayan Banking Bhd (Maybank), AMMB Holdings Bhd and Affin Holdings Bhd saw their loan loss coverage ratio drop substantially for the quarter ended Dec 31, 2015.

Considering the challenging operating landscape and tougher macroeconomic environment, this is not prudent, say banking analysts and observers.

“The loan loss coverage ratio is basically provisions for bad debt divided by non-performing loans. A decline in the ratio could mean the banks are provisioning less for their bad debt. If you look back to the 2008 global financial crisis, this was the case for some of the US and European banks — they provided less coverage for loan loss than needed,” says an analyst with a foreign research house.

“A low loan loss coverage is not necessarily a negative thing if there isn’t a big increase in future impaired loans. However, if impaired loans increase significantly and there isn’t enough coverage set, it would be a concern,” says another analyst, adding that it is similar to having a “rainy day” fund.

For the financial year ended Dec 31, 2015 (FY2015), Maybank’s loan loss coverage was 86.58%, compared with 99.98% a year earlier. Taking out the regulatory reserve, its loan loss coverage stood at 72%.

Analysts point out that Maybank is exposed quite a bit to the oil and gas industry. Its loan exposure to the energy sector as at Sept 30, 2015, stood at 2.76%, or about RM12.84 billion, according to the bank’s data.

“The oil and gas sector is a potentially risky segment and it would be wise to ensure loans for that sector are appropriately covered and provided for,” says the analyst with the foreign research house.

In a written reply to The Edge, Maybank says: “Our impairment assessment practices and processes are guided by Maybank Group’s internal credit classification and impairment policy which is in compliance with the requirements of Accounting Standards MFRS 139 — Financial Instruments: Recognition and Measurements.”

“For FY15, there were several newly impaired borrowers, which were primarily overseas corporate borrowers involved in trading, manufacturing, construction, shipping and oil and gas sectors. Detailed and thorough impairment assessment was undertaken for these borrowers in which the sustainability of cash flows from the business operations were assessed to be adequately supported, including assessment on potential recovery via realisation of collaterals pledged, and hence, impairment provisions were adequately provided for.”

“We have intensified our efforts to closely monitor and safeguard the group’s asset quality while ensuring the adequacy of impairment provisions as guided by our policy which is in alignment with the accounting standards.”

The banking group notes that its exposure to the energy sector, which includes O&G, electricity and nuclear fuel producers, has remained under 3% of its total loan exposure over the last two years.

“For all our loan exposures, we manage the credit risk of a loan from an individual borrower’s perspective as well as a sectorial perspective. For sectors that are affected by uncertainties and/or unfavourable industry outlook, such as the O&G sector given prolonged weakness in crude oil prices, extra attention and further evaluation will be carried out for loans in those sectors.

“The group is managing its exposure to the O&G borrowers and has put in place several measures to monitor and manage the credit quality of the borrowers. This includes the tightening of loan structuring for O&G-related loans and the setting up of a monthly Credit Monitoring Committee, which closely manages the weak accounts with timely and appropriate actions instituted to safeguard our portfolio. We also identify O&G borrowers that could require assistance in managing their debt obligations by providing them with a total solution in the event of a prolonged subdued oil environment,” Maybank says.

Meanwhile, AMMB saw its loan loss coverage drop to 94.8% for its nine months ended Dec 31, 2015, from 106% in 2014. Affin’s loan loss coverage dropped to 64.03% in 2015 from 75.57% in 2014.

“The loan loss coverage of AmBank Group stood at 94.8% for 9MFY16 compared with 106% a year ago, despite overall gross impaired loans declining 5% from RM1.65 billion to RM1.56 billion. The lower loan loss coverage was mainly driven by collective allowance, which has decreased from RM1.55 billion to RM1.22 billion, primarily reflecting better asset quality of our portfolio as a result of our de-risking strategy and intensified collection efforts,” AMMB says via email.

“Given the lending practices in Malaysia are very much collateral-based, we expect the industry loan loss coverage ratio will trend down as we move into a less benign credit environment. 

This is due to new impairments mainly coming from collaterised loans and hence, the provisions required are significantly less than the amounts outstanding of these impaired loans.”

“We believe the loan loss allowances are adequately provided at this juncture as our asset quality has strengthened through our portfolio rebalancing initiatives, where our gross impaired loan ratio has improved from 2.5% in FY2012 to 1.8% as at Dec 31, 2015,” AMMB adds.

Interestingly, in Indonesia, the banking regulator has requested lenders to set aside more funds to cover potential losses on loans this year. “We have asked them to increase their loan-loss provision for this year and for 2016 as well, so that they can absorb risks,” Indonesian Financial Services Authority (OJK) chairman Muliaman D Hadad said in December 2015, according to press reports.

At home, the majority of banks beefed up their coverage ratio as well last year.

Public Bank Bhd’s loan loss coverage ratio stood at 258.6% for FY2015 up from 218.6% in FY2014. Excluding the regulatory reserve, it was 120.8%.

CIMB Holdings Bhd’s loan loss coverage ratio rose to 84.7% from 82.7% in the same period while RHB Capital Bhd’s increased to 83.3% from 61.1%. The country’s smallest bank, Alliance Financial Group, also saw its ratio rising to 125.4% in December 2015, from 94.2% in 2014.

Meanwhile, Hong Leong Bank Bhd’s ratio of 126% as at Dec 31, 2015, is the highest in the banking system, notably higher that the industry’s loan loss coverage of 97% as at end-2015.

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