KUALA LUMPUR: Malaysian banks' earnings slumped in 2020, dented by sizeable pre-emptive provisions and thinner net interest margins (NIMs), RAM Ratings said.
The firm said while earnings should improve this year with NIM recovery, banks' profits were likely to remain pressured by still lofty, albeit lower, impairment charges.
"With an estimated 13 per cent of banks' loans under targeted repayment assistance or subject to restructuring and rescheduling, their true underlying asset quality has yet to surface.
"Banks bolstered their loss absorption buffers in 2020 by proactively setting aside provisions, in anticipation of higher delinquencies when the various forbearance measures are eventually lifted," RAM co-head of financial institutions ratings Wong Yin Chin said in conjunction with the publication of the agency's Banking Quarterly Roundup for fourth quarter (Q4) of 2020.
Wong said the average credit cost ratio of eight selected local banks had almost tripled from 30 bps to 84 basis points year-on-year.
Roughly half of the charges comprised management overlays and macroeconomic adjustments.
The elevated provisioning expenses last year were also exacerbated by several lumpy overseas impairments in the books of a couple of the banks.
In addition, banks' NIMs had been severely constricted by the aggregate 125 bp cut in the overnight policy rate last year, further compounded by modification charges in Q2 of 2020, Wong said.
After having plunged to a low of 1.83 per cent in Q2, the average NIM of the eight banks rebounded strongly in the subsequent two quarters.
This was underpinned by the absence of sizeable modification losses and the gradual repricing of deposits.
"Nonetheless, their NIM of 2.14 per cent (adjusted for modification expenses) for the full year stayed below the trend average of 2.20-2.30 per centfor the last five years."
Wong added that although more robust bond trading income and disciplined cost management provided some respite, the eight banks reported a significantly weaker pre-tax return on assets of 0.92 per cent and return on equity of 8.7 per cent in 2020 (2019: 1.36 per cent and 13.2 per cent).
Their earnings should improve in 2021, with an upward bias in NIM trajectory.
However, their profit performance would likely remain clouded by the uncertain operating landscape, Wong said.