Opt-in moratorium more manageable for banks

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THE second round of the blanket loan moratorium is expected to be less painful and more manageable for the banks.

This time around, as borrowers need to opt in to enjoy the payment deferment, chances are high that fewer individuals and businesses would participate in the moratorium.

Hence, it is expected to result in lower modification losses and the impact on interest income may not be as significant as last year.

While the extended movement restrictions may dampen the sector’s near-term earnings prospects, and in turn, sentiment on banking stocks, analysts do not foresee a repeat of the major selldown of banking shares like last year.

In fact, some analysts expect banking stocks to benefit from the market’s recovery play in the second half of 2021.

Kenanga Research analyst Clement Chua recommends “buying-on-weakness”, with regard to banking stocks.

Even if all borrowers take up the loan moratorium, MIDF head of research Imran Yassin Md Yusof (pic) tells StarBizWeek that banks will generally be able to manage the impact.Even if all borrowers take up the loan moratorium, MIDF head of research Imran Yassin Md Yusof (pic) tells StarBizWeek that banks will generally be able to manage the impact.

He points out that the first loan moratorium last year cost the banking sector an estimated RM6.4bil, arriving from modification losses and repayment assistance.

“That said, we opine there should be less pain (under the latest moratorium), given that most of the at-risk accounts and sectors have already opted for relief measures in the prior year.

“Additionally, as the moratorium this time around is on an opt-in basis, it is likely that the take up would not be as significant as last year, possibly resulting in much smaller modification losses.

“Still, this could spell the need for further provisioning by banks in anticipation of the deterioration of asset quality over time. As such, we do not discount the possibility of downward revision to corporate guidances, ” he says.

Following the recent blanket moratorium announcement, Kenanga Research also toned down its loans growth expectation to 3% to 4% for 2021, compared with 4% to 5% earlier.

This is premised on a prolonged lull in economic activity impacting personal spending.

The six-month loan moratorium, announced under the National People’s Well-Being and Economic Recovery Package or Pemulih, is applicable to all credit facilities, including hire purchase and home financing but not credit cards.

The credit facilities must be approved before July 1 and should not be in arrears for more than 90 days at the time the request for moratorium is submitted to the bank.

For credit card facilities, banks will offer to convert the outstanding balance into a three-year term loan with reduced interest rates to help borrowers manage their debt.

Small and medium enterprises can also take up the loan moratorium, however, this is subject to review and scrutiny by their banks.

Even if all borrowers take up the loan moratorium, MIDF head of research Imran Yassin Md Yusof (pic) tells StarBizWeek that banks will generally be able to manage the impact.

However, the impact will differ among banks and those with a bigger balance sheet will be able to minimise the impact better.

He points out that banks will still be able to recognise interest income, despite the payment deferments.

“The concern is, however, on the liquidity of banks as cash flow may be affected.

“However, we understand that Bank Negara will provide liquidity support.

“Furthermore, with the repayments and other initiatives in Pemulih such as Employee Provident Fund withdrawals, liquidity will likely not be an issue and we may see the current account, savings account growth to remain robust, ” he says.

Imran also does not foresee an impact on the loan provisions due to the moratorium.

He explains that the provisions undertaken by banks last year were “more of an overlay” and was based on individual banks’ assessment of the outlook and the pandemic, rather than on the loan moratorium alone.

In addition, during the loan moratorium period, loans will not be classified as impaired and there will be no need to provision them.

“The impact will be on the net interest margin (NIM), but we also have to bear in mind that banks can still recognise interest income despite not receiving any repayments.

“The impact on NIM will be on the modification loss where the banks will have to account for the difference in present value of cash flow received and the original cash flow.

“This came about from hire purchase and Islamic fixed rate loans.

“However, since we believe that borrowers taking up the second round of loan moratorium will likely have to sign an addendum to their loan agreements, we believe that banks will likely revise some terms in order to match the present value cash flows, ” he says.

As a result, modification loss will likely be lower this time around and therefore, the fundamentals of banks, including their capital buffers, will remain intact.

With banks better equipped to navigate the new loan moratorium and investors capable to better assess the impact to the banking sector, Imran thinks there will not be a selldown of banking stocks like last year.

“Furthermore, the situation is different as we have the vaccination programme now and a more positive outlook from the reopening of the economy, ” he says.

Echoing a similar view, another analyst says the impact of the loan moratorium on the banking stocks will be contained.

“We have seen how banks reacted last time in response to the crisis and the moratorium, and this gave us a clearer view that the banks are resilient despite the impact.

“Last year, 85% of borrowers resumed their payments after the first round of moratorium ended. This shows that this time around, not all will take up the loan given the opt-in mechanism.

“So, the impact on banks’ financials should be limited and I don’t see a reason that would trigger a selldown of banking stocks, ” he adds.

Meanwhile, UOB kay Hian Malaysia Research says the banking sector’s current consolidation phase provides an excellent opportunity for investors to accumulate on weakness.

“The current valuation of one times is at -1.5 standard deviation from its historical five-year mean, which is attractive.

“We do not think that the ongoing lockdown has a major upside risk on provisions as banks have by and large built in sufficient pre-emptive provisions for the vulnerable groups that are more likely to be impacted by the lockdown, while a swifter rollout of Covid-19 vaccinations in the second half of 2021 should help to spur economic recovery, ” it says.

The research house also points out that the current risk-reward balance for banking stocks is attractive.



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