New Covid-19 waves could delay banking recovery, says rating agency

 

S&P Global Ratings says the government’s loan moratorium is unlikely to see a big take-up rate because of the additional interest burden.

KUALA LUMPUR: S&P Global Ratings expects new Covid-19 waves to further delay business recovery for the Malaysian banking sector as the asset quality trend of banks will stay weak over the next two years.

It said the new waves, lockdowns and slow progress of the vaccination rollout could dampen economic recovery and weigh further on borrowers.

South and Southeast Asia financial services ratings associate director Nancy Duan said the rating agency had also lowered the Gross Domestic Product (GDP) projection for Malaysia this year to grow at 4.1%, down from an earlier projection of 6.2% in March 2021.

“Accordingly, we have lowered our forecast of industry loan growth to 4% for 2021 from 6%.

“That said, the government is pushing to accelerate the vaccine rollout. Effective containment of Covid-19 could support a solid economic rebound in 2022 that we forecast to grow 6.3%,” she said in the Global Banking report today.

She noted that banks’ asset quality hinges critically on the employment situation in the country, given that 58% of the system’s loan book is exposed to the household sector.

“We expected the unemployment rate to remain largely stable despite some notable weakening from the pre-pandemic level of 3-3.5%. In our view, the unemployment rate could peak at 4.8% in 2021 before declining to 4.4% in 2022, compared with 4.5% in 2020,” she said.

As for the industry’s non-performing loan (NPL) ratio, it will likely rise to 3-4% of gross loans by the end of 2022, compared with the reported 1.6% as of end-April 2021, while credit costs will stay elevated at a cumulative 110 to 120 basis points (bps) over 2021 and 2022 combined, compared with 79 bps in 2020, said Duan.

She also noted that around 15% of Malaysian banks’ loan book is covered under various targeted assistance measures.

Duan noted that while the government has recently announced a second six-month blanket moratorium for all individuals and small and medium enterprise (SME) borrowers from July onwards, there won’t likely be a substantial jump in the moratorium take-up rate, given the additional interest burden.

“Our base case assumes most weak credits are already covered by the ongoing targeted assistance programmes. In comparison, the moratorium take-up rate peaked at 75-80% of the industry’s loan book during the first six-month blanket moratorium in 2020,” she said.

On another note, she said Malaysian banks’ solid capital buffers of 14.6% common equity Tier-1 ratio and still prudent dividend payouts are important mitigants that support current credit standing and ratings.

Therefore, she viewed that the pace of vaccination is the key risk mitigant to cap the short-term downside to the local banking sector.

The new aggressive virus variants, she said, remain a notable risk to GDP growth next year.

“A more protracted economic recovery could translate into rising job market pressure and more asset quality pains for domestic banks,” she added. - FMT