Credit rating agency S&P Global Ratings (S&P) said that Malaysian banks have proven their robustness by demonstrating resilient credit portfolios as they move out from the blanket automatic moratorium that ended in September.
In its statement, the agency said that the repayment rates for major banks’ retail and small and medium enterprise (SME) portfolios have significantly improved since October. “On average, the proportion of the loan books that require further repayment assistance has dropped to 8-13% for major Malaysian banks we rate, from 70-80% in the initial phase of the blanket moratorium,” it said.
That said, S&P also cautioned that this initial recovery of repayments may be an unreliable gauge of the underlying strength of affected borrowers. “However, the industry only has repayment data for one month, and we believe a longer period of observation is needed to confirm the underlying resilience of affected portfolios,” it commented.
S&P also shared some of its other views, including the opinion that the additional three-month repayment assistance offered to B40 and SME borrowers will only affect Malaysian banks’ asset quality minimally. This is because the B40 segment makes up only 10-20% of the loan books.
“We estimate 25-40% of local banks’ gross loans are eligible for this relief, significantly lower than 70-80% of loans under the first moratorium. We expect more eligible borrowers to opt out of this moratorium, given that the deferral implies higher financing costs eventually. As a result, the final coverage of the additional three-month moratorium could be notably lower than 25% of banks’ loan books,” the agency explained.
Aside from that, S&P maintained its forecast that the net interest margin of Malaysian banks will see a compression of 15-20 basis points (bps) this year. To briefly explain, net interest margin is a measurement that compares the net interest income generated by banks from their credit products (such as loans) with the interest that they pay to their customers for other banking products (such as savings accounts). A compression of the net interest income essentially means less profitability for banks.
On top of that, the agency also predicted that sector-wide returns on asset could fall to 1-1.2% in the next one to two years, from 1.5% in 2019. Additionally, the banking industry’s gross impaired loan ratio continued to hover at 1.4-1.5% during the blanket moratorium, and is set to rise to 3.9-4% by the end of 2021.
Lastly, S&P said that it believes that the cumulative credit costs will stand at 130 bps in 2020 and 2021. These costs are defined as the annual provisions allocated for gross loans, presented in percentage.