Malaysia’s NPL level expected to rise once debt relief measures end, according to Moody’s
KUALA LUMPUR (April 7): Malaysia’s level of non-performing loans (NPLs) is expected to increase once various debt relief programs end, said Li Tengfu, analyst at Moody’s Financial Institution Group.
Speaking to Moody’s Investor Service Inside Asean Malaysia Media Roundtable, Li said the percentage of loans applicable for debt relief in Malaysia is relatively high, although not as high as in Indonesia or Indonesia. Thailand.
Li expects some of these loans to eventually default when debt relief programs for retail businesses and small and medium-sized businesses end in June 2021.
“We have a stable outlook for asset quality, and one of the major mitigating factors is that when looking at the composition of loans under repayment programs, they largely come from the retail segment. retail, especially mortgages and auto loans. They somehow reflect the composition of lending in the banking system and will help mitigate potential losses, “he said, noting that Malaysian households have strong buffers in the form of of financial assets and could mitigate the losses that may arise from those loans which have been the subject of repayment assistance.
The analyst also felt that another key mitigating factor was the proactive loan provisioning made by Malaysian banks in 2020 against credit buffers. He noted that in 2019 loan loss coverage stood at 90% and by 2020 it had increased to 140%.
Li added that some of the loan losses that might materialize later could be absorbed by the banks with these buffers in place.
Based on its baseline assumption, Moody’s Financial Institution Group does not expect the cost of credit or the allowance for loan losses to increase in the second half of 2021, when the various debt relief measures expire.
In 2020, the cost of credit was around 80 basis points (bps), while in 2019 it was below 50 bps.
“We expect that the combination of a recovering economy and proactive provisioning will help banks gradually reduce credit costs in the second half of 2021 (2H21) and into 2022. Of course, that depends on the whether or not the path of economic recovery remains intact, “Li added.
As such, he expects Malaysian bank profitability to improve this year, but not to pre-Covid-19 levels, given that there are still uncertainties about the quality of assets.
He also expects banks’ interest margins to improve, due to the continuation of timed deposits with pricing at sufficient liquidity conditions, as well as the lack of one-time change loss seen l ‘last year.
For 2020, he noted that the pre-provisioning profitability of Malaysian banks remained fairly resilient, following efforts to tighten operating expenses and capitalize on investment gains and falling installment rates, liquidity conditions remaining benign in 2020.
As such, he added that pending an increase in the net interest margin, it would be positive for profitability, as interest income accounts for 70-80% of total income.
The analyst noted that 2021 would continue to see Malaysian banks’ capital and liquidity remain strong.
When asked if the trend of increasing NPLs will increase in the medium term, Li said he estimates that the ratio of NPL will drop from 3% to 4% from 1.5% to 2% in 2019.
He believes that banks would be able to absorb increases in NPLs mainly because of the increase in their loan loss reserves. At least in the first half of 2021, banks would continue to proceed with their proactive provisioning, he added.
Li said a large portion of NPL comes from the retail segment and the average loan value is quite low – and the potential loss of NPLs could be mitigated by this.
He also noted that regulations surrounding financing, especially in the real estate market to curb speculation, have also helped, with Malaysian households holding strong financial assets.
At the same time, NPLs could also be addressed by the high capital levels of Malaysian banks, he added.