RAM: Relief measures delay recognition of problem loans

PETALING JAYA: The emergence of bad loans in the banking system is expected to be delayed in view of the sizeable proportion of loans under relief, according to RAM Ratings.

With the reintroduction of the six-month blanket loan repayment moratorium for all retail, microenterprise and affected SME borrowers, it said impaired loans will continue to be suppressed for the rest of the year and even in the first half of 2022 (H1’22).

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. Targeted relief programmes offered by banks were already available prior to this.

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% (ranging from 22% to 32% for individual banks) from the previous quarter for eight selected banking groups.

RAM’s co-head of financial institution ratings Wong Yin Ching said this figure may creep up in the coming months although it understands the number of applications has already slowed in recent weeks.

“Not all relief loans will turn problematic as we believe 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 a statement today in conjunction with the publication of the rating agency’s Banking Quarterly Roundup Q2’21.

“The system’s underlying asset quality however will 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%,” she added.

It also noted that all eight banks posted a higher year-on-year pre-tax profit in Q2’21, largely due to a low base effect, but performance was mixed on a quarter-on-quarter (q-o-q) 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.

NIMs have since staged a strong recovery (Q2’21: 2.33%; Q2’20: 1.83%), but the q-o-q improvement was modest (+2bps) as most deposits had already been repriced lower by Q1’21. 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 Q3’21 on account of the recent moratorium, but the quantum will be significantly lower than last year’s.

“In Q2’21, the average credit cost ratio (annualised) of the eight banks moderated q-o-q to 52bps from 61bps. We however, maintain our full-year projection of 60-70bps (2020: 84 bps) as we foresee that banks will continue or 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 previous year’s, driven by NIM recovery and to a lesser extent, lower provisioning charges,” Wong added.