This article first appeared in The Edge Malaysia Weekly on October 25, 2021 - October 31, 2021

BANKS are likely to see a minimal impact on earnings from helping out troubled borrowers in the bottom 50% income group (B50) under the recently announced Urus programme, say analysts.

CIMB Group Holdings Bhd, the country’s second largest banking group by assets, told analysts last week the impact on its earnings would likely be “manageable”. It is one of the first banks to have held a meeting with the investment research community since Urus, a financial management and resilience programme, was unveiled on Oct 15.

As it stands, it is still too early to assess Urus’ actual impact as banks are still trying to work out how big their exposure is to B50 customers who are eligible to apply for help. Under Urus, these are defined as people with a gross household income — not salary — of up to RM5,880 and who have either lost their job or experienced a pay cut of at least 50%. Additionally, they need to already be under some kind of existing repayment assistance programme.

In the case of CIMB, it shared with analysts that the B40 group accounts for about 20% of borrowers under its payment relief assistance (PRA) programme at home.

“The B40 group makes up about 20% of CIMB’s borrowers under domestic PRA, so the B50 group would be slightly higher. Assuming an acceptance rate of 50%, our back-of-the-envelope calculation estimates a 2% impact on group earnings in FY2022 from interest foregone,” says Maybank Investment Bank (MIB) Research in a report after meeting with CIMB.

The interest foregone refers to the fact that the eligible B50 borrowers will be entitled to interest rate exemption on their loans for up to three months and a reduction in instalment payments for up to 24 months, which will include lower interest rates. They will be able to apply for the programme from Nov 15 to Jan 31, 2022.

Nevertheless, CIMB, like other banks, will also have to incur modification losses in 3Q2021 and 4Q2021.

“From an accounting perspective, aside from the impact to earnings from interest foregone from Urus applicants, there will be a modification loss as well, in addition to that under Pemulih [an opt-in six-month moratorium that began on July 7]. Nevertheless, the modification losses, which are expected to impact earnings in 3Q2021 and 4Q2021, are one-off in nature and will be clawed back over time,” states MIB Research.

It sees CIMB’s core net profit coming in 209.2% higher year on year at RM4.42 billion in FY2021 and thereafter, at RM5.54 billion in FY2022.

Under Urus, banks will be forking out RM1 billion to fund the cost of the reduction in interest/profit costs.

In general, however, analysts are positive on the Urus programme as it offers help to the B50 on a targeted rather than blanket basis. Hence, the financial impact on banks will likely be smaller than initially expected. Recall that there were initially concerns that the assistance would have to be offered to all B50 customers.

“[Earlier], we had estimated an average 7% earnings impact on banks’ earnings from potential modification losses. The financial impact on banks under Urus is likely smaller, we think, but we await further clarification on the programme,” says MIB Research.

At this point, without granular data on banks’ customers, analysts are not able to properly gauge which of the local banks will be the most impacted by Urus. Some suggest Bank Rakyat and MBSB Bank may be among the most impacted, pointing to the fact that civil servants make up the bulk of their retail customer base.

“But it’s hard to say because while many of these civil servants may fall within the definition of B50, their jobs are not affected and their salaries are stable. So, you really need to be more granular and look at the profile of the borrowers … but it’s very difficult to get those statistics from banks,” MIDF Research’s head of research Imran Yassin Yusof tells The Edge.

He points out that Bank Islam Malaysia Bhd too, which is mainly a retail bank, tends to have a big proportion of customers who are civil servants or work for government-linked companies (GLCs). “But even so, you can see that their gross impaired loan ratio is low compared with the industry because these customers are seen as stable and less risky.”

In a recent interview with The Edge, Bank Islam CEO Mohd Muazzam Mohamed shared that many of the bank’s customers who may fall under the B50 definition have not actually lost their jobs or experienced a salary cut. He says the impact of Urus on the bank’s financials will be much more manageable than if the help were offered on a blanket basis to the entire B50 segment.

Hong Leong Investment Bank (HLIB) Research banking analyst Chan Jit Hoong sees the industry’s modification losses — as a result of Urus and other assistance programmes — coming in lower this year than in 2020. Last year’s modification losses, incurred mainly in the second quarter, were sizeable as the loan moratorium at the time was offered on a blanket basis.

“I would expect 3Q2021 modification losses to be bigger than that of 4Q2021, but smaller than in 2Q2020. I’m looking at modification losses as a one-off impact. For the interest portion, based on my calculation, it should be less than a 2% impact on earnings. So I’m not changing my earnings forecast for the industry,” he tells The Edge.

Meanwhile, most research houses, including those of MIB, CIMB, HLIB and MIDF, continue to have a positive stance on the banking sector.

MIDF’s Imran has forecast an industry earnings growth of 20% this year and 13% in 2022, after a contraction of about 25% last year. He has a “buy” call on Public Bank Bhd (target price RM5.10), Malayan Banking Bhd (RM8.90) and RHB Bank Bhd (RM5.90).

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