Malaysian banks booked lower credit costs than other APAC emerging markets in 2020 that allowed for a shallower trough in earnings, but will entail a longer path to profit normalisation, says Fitch Ratings. The continued withdrawal of debt relief will lead to more timely recognition of non-performing loans (NPLs), which we project to rise to 2.6% of system loans by the end of 2021.
Improvement of banks’ profitability is likely to be limited in 2021 as loan impairment charges remain high. The agency believe banks’ credit costs in 2021 will approach 2020’s level as loan-loss coverage ratios remain low relative to its projections of the NPL ratio, notwithstanding general provisions set aside in 2020.
Visibility into banks’ asset quality continues to be clouded by repayment assistance programmes and fiscal relief; it is estimated that total loans under repayment deferral to account for 11% of the six major banks’ portfolios as of February 2021. However, clarity should gradually improve as most of these programmes roll off in the coming months.
Much of the work in addressing credit impairments still lies ahead for Malaysian banks. However, their loss-absorption buffers remain adequate as banks’ capitalisation are supported by continued core profitability and subdued balance sheet growth in the near term.
The system non-performing loan (NPL) ratio rose gradually for the fourth straight month to 1.6% in January, after a six-month blanket debt moratorium expired, with 85% of the increase in NPLs coming from the household sector. Fitch
Ratings expects credit impairments to increase in the coming months as Malaysia was under varying degrees of lockdown for much of 1Q21. Rates of unemployment (January: 4.9%; end-2019: 3.3%) and underemployment (4Q20: 2.4%; 4Q19: 1.1%) have also climbed since September.
Banks Increase Provisions: A spike in coronavirus infections since September 2020 increased economic uncertainty, just as the blanket moratorium ended. This marred visibility into banks’ asset quality, which prompted most of the six major banks to increase credit provisions in 2H20 relative to 1H20. This improved loan loss coverage to 105% of NPLs (end-2019: 80%), most of which came in the form of general provisions. Nevertheless, banks’ collective credit costs in 2020 remained the lowest among APAC’s emerging markets. Banks’ NPL ratios were suppressed by the moratorium and we project the system’s NPL ratio to rise to 2.6% by end-2021. This means that major banks’ credit provisions will remain high in 2021 and similar to the level in 2020.
More borrowers applied for debt deferrals in 1Q21 amid renewed economic difficulties, but not to expect a large increase in relief loans, which is estimated to be 11% of the top-six banks’ loan books. Repayments are resuming, as even targeted debt relief has begun to roll off. The government’s two recent stimulus packages have emphasised fiscal aid rather than new loan deferrals and the risk of widespread lockdowns leading to a broad moratorium have decreased. This should gradually lead to better clarity on asset quality.
Limited Profitability Upside: Banks’ operating profit to risk-weighted assets (RWA) declined yoy at all six banks in 2020, as credit costs more than tripled in aggregate. Do not expect profitability to improve significantly in 2021, despite the economic recovery, as revenue growth is likely to be checked by anaemic loan growth and only a slight increase in the lending margin. The emergence of NPLs after relief programmes expire will raise credit impairment charges above the pre-pandemic average to hamstring the improvement in profitability in 2021.
Capitalisation Stable: Low balance-sheet growth, continued profitability, moderate credit deterioration and a reduction in cash dividends in 2020 kept banks’ capital ratios stable. Expect most banks’ loss-absorption buffers to remain adequate in 2021, despite increasing RWA due to higher NPL recognition and as banks begin to raise dividend payments