BNM provided a briefing update on its Financial Stability Review (FSR) 1H2021 publication last Friday.
1Q21 saw the improvement in the performance of businesses with the easing of movement restrictions. This was reflected by the increase in operating margin, interest coverage ratio (ICR), cash-to-short-term debt (CASTD) and debt-to-equity ratio to 6.3%, 5.4x, 1.4x and 21.9% respectively in 1Q21.
However, with the reimposition of full a lockdown nationwide from 1 June 2021, the percentages of firms at risk for hotel & restaurants, air transport, construction and real estate sectors rose to 50.0%, 46.2%, 36.7% and 38.7% respectively in 2Q21 (1Q21: 35.0%, 15.8%, 26.3% and 23.6%).
The overall share of rescheduled and restructured (R&R) loans as of end-July 2021 was 22.5%. Loans to hotels & restaurants were the most rescheduled and restructured followed by the financing extended to the real estate, construction, transportation and storage sectors.
SMEs had limited cash buffers for MCO 3.0. Nevertheless, the cash buffers of SMEs in MCO 3.0 were still higher than MCO 1.0. This was the result of companies adapting to operating conditions, accessibility to moratorium for relief of loan repayments and the improvement in business conditions.
July 2021 saw the increase in the share of SME loans (in terms of loan value) under R&R to 30.7%. This compared to 16.5% in March 2021 and 15.3% in December 2020.
The percentage of SME loans in stage 2 increased to 15.3% in July 2021 vs. 14.4% and 14.1% in March 2021 and December 2020 respectively. On a comforting note, the impaired loan ratio for SME loans has only increased slightly to 2.6% (March 2021: 2.5%)
The overall SME loans registered a growth of 6.0% with an approval rate of 77.3%. The share of SME loans backed by credit guarantees such as CGC and SJPP rose to 7.0% while the share of SME loans under the BNM’s funding scheme (SRF, Penjana Tourism) climbed to 5.0%.
In 1H21, the property market moderated amidst stricter mobility restrictions. Vacancy rates for office and retail spaces in Klang Valley rose in 2Q21 contributed by the increase in work from home arrangements and shift the e-commerce by consumers for spending. Meanwhile, occupancy rates for hotels plummeted.
Transactions in the residential property markets moderated in 1H21. The bulk of it (81.0%) was contributed by transactions for the purchase of residential properties of below RM500,000.
The risk for a broader decline in house prices will be limited as more than 80.0% of the residential properties are owner occupied. As for properties acquired for investment purposes, the bulk of the investors (82.0%) has income of more than RM5,000 per month, capable of withstanding shocks. We gather that most of the housing loans are in positive equity where the borrowers are less inclined to default.
May 2021 saw the percentage of household loans under repayment assistance (RA) based on share of accounts declined to 10.6%. However, with the MCO 3.0 imposed from June 2021 that percentage has surged to 25.4% in July 2021. In terms of the percentage of share by loan value, it has risen to 30.0% in July 2021 vs. 13.7% in May 21. One in three household loan borrowers has applied RA to conservatively build up their buffers. The household financial asset-to-debt and liquidity financial asset-to-debt ratios remain stable at 2.2x and 1.5x respectively compared to the pre-pandemic levels in 2019.
We gather that based on the simulated income and employment shocks, 11.0–15.0% of households will need to draw on their pre-existing savings. The impact is manageable with only 1.9% of households at risk of depleting their cash buffers.
Banks have continued to set aside pre-emptive provisions against potential credit losses. In 1H21, provisions grew 36.3% YoY. Banks continued to top up management overlays which comprised 40.0% of the total provisions. Even though provisions were still elevated, it was lower than 2020’s 42.0% YoY growth. Compared to pre-Covid 19, provisions have increased by 54.0% or RM11.8bil.
Banks are likely to remain prudent and maintain the pre-emptive provisions built up in 2021. 2022 is likely to see write-backs in provisions as the weekly applications for RA by both retail and SME borrowers have tapered after the initial surge with the introduction of the Pemulih moratorium on 6 July 2021.
The easing of the movement restrictions and opening of more economic sectors since 16 August 2021 have allowed more businesses to operate. This is poised to assist borrowers to eventually resume their normal loan repayments after the broad payment assistance program comes to an end.
Total provisions to total loans stood at 1.8% while loan loss coverage for the sector including regulatory reserves was 129.0%. Banks continued to prudent in their approach in recognizing higher credit risk earlier. In addition, they have adopted a more conservative provisioning models and increased their provisions in the form of management overlays.
Earlier this year, a top-down stress test was performed on the resilience of banks. This was complemented by another bottomup stress test recently on individual banks. Under this bottom-up stress test, the scenario of a gradual economic recovery towards 2H22, coupled with no further extension of support measures, were included. Key assumptions in this test included the probability of default multipliers on selected portfolio/segments, shocks on overseas branches of banks, rise in bond yields and surge in loans under RA in 2021 before tapering by 2H22. The findings of this test showed that banks were still able to withstand the shocks even as credit cost rose 4x compared to the level in 2020 and total capital ratio declined 4.4ppt by end-2022.
Moving forward, the focus on the financial sector will be on managing climate risk. Plans for mandatory climate disclosures will be finalized by end-2021. Also, by end-2021, a reference guide for climate risk management and scenario analysis will be issued. A stress test on industry wide climate change will be conducted in 2024.
Subdued loan growth and additional modification loss from the implementation of the Pemulih moratorium will be reflected in the upcoming 3Q21 results of banks. Further to that, 4Q21 will likely see a reduction in interest income of banks due to the implementation of the 3-month interest waiver for retail loans under the moratorium where borrowers are in the B50 segment (in terms of income). Also, higher MGS yields will present challenges to investment and trading income.
Nevertheless, we see loan growth to gradually pick up pace in tandem with the economic recovery as movement restrictions have been eased. With the tapering of applications for RA and potential resumptions of the usual loan repayment following the increased in number of businesses and the capacity allowed to operate, we see a potential for write-backs in management overlays which banks have built up since 2020.
Meanwhile, the US Treasury yields have recently continued to rise with 9 members of the FOMC in favour of an earlier rate hike in 2022 in the recent Fed meeting as compared to 7 previously. The pressure for rate hikes is expected to also spill over to the emerging markets including Malaysia. Any increase in interest rates is positive on banks’ interest income and margins.
Retain our OVERWEIGHT stance on the sector with our top BUYson RHB Bank (fair value RM6.80/share), Maybank (FV RM9.90/share) and CIMB Group (FV RM5.80/share). We favour banks with expected improvement in regional performance from the gradual economic recovery and banks with undemanding valuations.
