KUALA LUMPUR: The emergence of bad loans in the Malaysian banking system is expected to be delayed in view of the sizeable proportion of loans under relief, RAM Ratings said.
The agency said with the reintroduction of the six-month blanket loan repayment moratorium, impaired loans would continue to be suppressed for the rest of the year and even in the first half of 2022 (1H22).
The latest regulatory support measure – on an opt-in basis but automatically approved – came into effect in July following a rise in infections and stricter lockdowns which resulted in major disruptions to business activity.
"Based on data obtained during the recent bank results briefings, the average proportion of domestic loans under relief or restructuring and rescheduling programmes doubled to about 26 per cent from the previous quarter for eight selected banking groups.
"This figure may creep up in the coming months although we understand the number of applications has already slowed in recent weeks," RAM said in a statement today.
Its co-head of financial institution ratings Wong Yin Ching said not all relief loans would turn problematic as the agency believed some borrowers took the payment holiday as a precaution.
"This is evident from the high percentage of relief loans with no arrears or held by the T20 income group, as shared by some banks," Wong said in RAM's banking quarterly roundup for second quarter (Q2) of 2021.
Wong said the system's underlying asset quality however would only become clearer after forbearance measures are phased out, with bad loans likely to peak in late 2022 or early 2023.
"As at end-July 2021, the banking industry's gross impaired loan ratio stood at a still-low 1.67 per cent," she said.
Wong also noted that all eight local banks had posted a higher year on year (YoY) pre-tax profit in Q2 2021.
This was largely due to a low base effect, but the performance was mixed on a quarter-on-quarter (QoQ) basis.
"Results for the previous corresponding period were marred by a sharp squeeze in net interest margins (NIMs) because of substantial modification charges arising from the first loan moratorium and multiple policy rate cuts.
"The system's NIM is envisaged to hover at the current level in the coming quarters and may even see slight compression. We expect banks to book some modification losses in Q3 2021 on account of the recent moratorium, but the quantum will be significantly lower than last year's," she said.
According to Wong, the average credit cost ratio (annualised) of the eight banks had moderated QoQ to 52 basis points (bps) from 61bps in Q2 2021.
RAM has maintained its full-year projection of 60bps-70bps from 84bps in 2020 as the agency anticipates that banks will continue or even step up efforts to build up provision reserves as the protracted lockdown has dampened nascent economic recovery.
"Despite heightened uncertainties, profit performance for the full year is expected to be better than the previous year's, driven by NIM recovery and to a lesser extent, lower provisioning charges," Wong said.