Uneven Recovery Of Loans Might Weigh Down Malaysian Banking Recovery This Year : S&P Global Ratings

S&P Global Ratings believes an uneven recovery of loans under moratorium could continue to weigh this year as a bounce-back in 2021 profits doesn’t tell the full story of the Malaysian banks.

It said that at least two drivers of last year’s profit bounce are likely to stay on track: lower credit costs (a gauge of provisions) and accelerating loan growth. However, the margin improvement last year has likely run its course for now,” it said

It said that nonperforming loans (NPLs) could rise to 2.5%-3.0% in the next 12 months after various moratorium programs expire by mid-2022, as planned. That compares with a 1.4% NPL ratio in 2021.

“Borrowers from small and midsize companies [SMEs] and low-income households are the most vulnerable segments under the loan-relief schemes offered by Malaysian banks,” said S&P Global Ratings credit analyst Nancy Duan. “Lenders that have larger loan exposure to SMEs and the mass-market consumer banking will lag in their recovery behind those with established niches in the wealthy retail segment and big corporate.”

It said that it estimates that credits to SMEs and low-income households account for roughly 30%-35% of the industry-wide loan book. “A recently announced Malaysian ringgit 40 billion government relief program that specifically targets micro, small and medium-size enterprises and the informal sector will help facilitate much-needed business recoveries for small businesses. Still, this is unlikely to forestall the weakening underlying credit trend of those borrowers,” it said

On the other hand, it said that the sector’s high provision coverage of non-impaired loans at around 1.3% as of end-2021 is a positive for credit costs. This compares with the low 0.8% coverage pre-COVID.

“Banks could start unwinding the accumulated provision buffer for non-impaired loans in the second half of 2022, once the dust of moratorium uncertainties settles,” said Ms. Duan. “This could meaningfully reduce the need for additional provisions despite rising NPLs.”

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