Thursday 28 Mar 2024
By
main news image

This article first appeared in The Edge Malaysia Weekly on April 13, 2020 - April 19, 2020

BANK Negara Malaysia, in its Financial Stability Review released on April 3, is fairly optimistic about the banking industry’s ability to withstand the economic turmoil brought about by the Covid-10 pandemic.

However, most banking analysts are choosing to err on the side of caution by maintaining a “neutral” stance on the sector, even though sector valuations are at multi-year lows. They are worried about downside risks, in particular, a stronger-than-expected rise in credit costs, which would ultimately hurt earnings. Investors should buy stocks selectively, they suggest.

“While we share Bank Negara’s view that Malaysian banks are able to withstand the economic shock in 2020, we remain concerned about the negative impact of weak loan growth and the expected rise in credit costs on banks’ earnings this year. As such, we retain our ‘neutral’ call on the sector,” says CGS-CIMB Research. Its neutral stance is supported somewhat by what it considers an attractive potential dividend yield of 5.5% this year.

Bank Negara projects economic growth of -0.2% to 0.5% this year, sharply down from last year’s 4.3%, while the International Monetary Fund expects a global recession.

Industry sources say banks are still struggling to adjust to this new, unprecedented crisis.

“There is no doubt that earnings will be down this year, but the question is by how much as there is still so much uncertainty … such as, how long the Movement Control Order will last, and to what extent the government’s economic stimulus package will actually help. Many of the banks are still trying to figure out the accounting treatment for the six-month moratorium [on repayments that they are offering retail and SME borrowers from April 1],” one tells The Edge.

The source adds that although banks have been given some relief on the MFRS 9 accounting standard front — that is, no automatic deterioration in the staging of loans during the six-month moratorium period — it does not mean that the banks will not move the loans to Stage 2 or 3. In some cases, it may be prudent to do so.

“What it means is banks will have to assess the borrowers that have opted for the moratorium … and move the really problematic ones to the next stage. Yes, they can choose not to do so over the six months and buy some time, but eventually they will have to … this is a real credit risk issue,” the source says.

Loans in Stages 2 and 3 require banks to make expected credit losses over the lifetime of the loan. Once in Stage 3, the loans have to be classified as impaired.

Analysts that The Edge spoke to say banks’ second and third-quarter earnings — which is when the moratorium takes effect — will likely be poor. “We don’t think they will make losses, but we cannot discount the possibility either,” says one. At this point, it is hard to gauge as there are still so many uncertainties, including how long the MCO — which has significantly slowed down economic activities — will last, he adds.

AffinHwang Capital Research expects a contraction in loan growth this year.

“[This will come] from the auto, residential property, commercial property and trade financing segments. Banks continue to face asset-quality risks from their oil and gas (O&G) portfolio [as oil prices stay low], largely big ones such as Malayan Banking Bhd, CIMB Group Holdings Bhd, RHB Bank Bhd and AMMB Holdings Bhd.  Dividend restrictions may potentially be triggered if Bank Negara decides to take a more cautious stance,” it warns in an April 6 report.

Given the heightened downside risks, it has an “underweight” call on the sector. It has projected a 20% year-on-year decline in the sector’s core earnings per share for this year, and modest growth of 1.5% in 2021.

Analysts also expect one or two more 25-basis-point cuts in the overnight policy rate this year, which would drag down banks’ profits further.

AllianceDBS Research notes that public-listed banks have yet to factor in the effects of the Covid-19 outbreak into their FY2020 guidance.

“At this juncture, the banks have not yet revised their FY2020 guidance and targets. The overall impact to credit costs and asset quality is unlikely to emerge until after the MCO has lifted, as this would be clouded by take-up of the six-month moratorium provided to retail customers and SMEs. Only Maybank has guided for a Covid-19-related hit to credit cost of up to 10bps, based on its exposures of around 3% of total group loans. We understand that during this moratorium period, only exposures that are structurally compromised (and not temporarily disrupted) would incur additional expected credit loss allowances, though recent news reports of stress on SMEs during the MCO period without adequate government support could be material,” it says in a report.

It estimates that every 5bps increase in credit cost would reduce sector earnings this year by 3%.

Bank Negara, in its recent assessment of the sector, said its stress tests show the financial system will remain resilient even under an extreme adverse shock environment. It pointed out that although the impact of Covid-19 on the economy is likely to be significant in the short term, banks are entering this period from a position of strength.

The banking sector’s capital buffer, in excess of the minimum regulatory requirement, stood at RM121 billion as at end-2019, more than double that during the last global financial crisis.

 

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.

      Print
      Text Size
      Share