BARRING the emergence of new virus variants which can affect the economy, banks expect to see a gradual improvement in earnings recovery.

       Industry loan growth has picked up for the first time in six months, in September, after the phased re-opening of the economy and is expected to gain further momentum.

       Hong Leong Bank expects to maintain its above industry growth, evidenced by the sustained loan and financing growth at plus 6.8% year-on-year (y-o-y) for financial year 2021 (FY21).

       “We remain focused on supporting customers in their personal and business endeavours, and will continue to do so, in line with the recovery of the economy in FY 2022,’’ said Hong Leong Bank Bhd group managing director and CEO Domenic Fuda.

       With the economy stabilising, consumer spending is showing signs of picking up as consumers are returning to their daily socio-economic activities.

       Services are strongly rebounding as consumers travel more, venture out shopping and dining in restaurants, following pent-up demand from the various movement control orders (MCOs).

       “We remain focused on supporting customers in their personal and business endeavours, and will continue to do so, in line with the recovery of the economy in FY 2022,’’ said Hong Leong Bank Bhd group managing director and CEO Domenic Fuda.(pic)

       “Consumer confidence, as evident from the Malaysian Institute of Economic Research (MIER) consumer sentiment index returning to the optimism level, is translating to credit and debit spend and merchant sales, which had picked up to pre-MCO levels in October, on the back of continuous momentum,’’ said Fuda.

       The MIER consumer sentiment index for the third quarter of 2021 (Q3’21), rose to its highest level of 101.7 since Q3’18; it was also the first time that the index had surged past the 100-point optimism threshold.

       “With the anxiety surrounding Covid-19 declining, as a result of one of the fastest vaccination rates in the world, businesses ramping up activities after various lockdowns and the labour market stabilising, we expect to see a gradual improvement in earnings recovery,’’ said Fuda.

       Hong Leong Bank believes that its 5.0% to 6.0% loan and financing growth target for this financial year is achievable, backed by a healthy loan and financing pipeline for mortgage and auto loans, the pick-up in retail spend and continued support to small and medium scale enterprises (SMEs) as well as businesses in the recovery phase,

       Asset quality remains a key imperative; Hong Leong Bank had built additional pre-emptive impairment buffers of RM511mil in FY21, given the uncertainties faced in the business environment during that period.

       With the buffers built, the Hong Leong Bank group’s loan and financing impairment coverage rose further to 247%, putting the group in a good position to withstand unanticipated shocks in its loan portfolio.

       Inclusive of the value of collaterals that the Hong Leong Bank group holds on its gross impaired loans, its loan and financing impairment coverage is strongly positioned at 317%. (Impaired loans are those where it is unlikely that the full contractual principal and interest will be repaid).

       Hong Leong Bank does not expect a significant rise in the overnight policy rate, if any, in 2022.

       Its estimate of an increase of 25 basis points (bps) or 0.25%, will likely be a positive 1.0 to 2.0 bps on net interest margin.

       “With the economy in the recovery phase and stabilising, coupled with high vaccination rates, there should be good opportunities for retail and especially business customers to invest in their businesses to take advantage of the low cost of borrowing, as financing is more affordable,’’ said Fuda.

       To ensure sustainable economic and fiscal growth, it is important to look into medium and longer term growth opportunities, as well as the country’s fiscal position.

       Financial inequality, which has been exacerbated by the pandemic, should also be looked into, to ensure that those affected can focus on their journey of recovery, and emerge stronger.

       A loan growth of 2.5% to 3.6% for 2021, and 4.0% to 5.0% for 2022, has been projected by CGS-CIMB Securities, while loan loss provisioning is expected to decline by 33% in 2021 and 4.8% in 2022.

       For every 25 bps in interest rate hike, banks’ net profit is expected to increase by 2.4%, said CGS-CIMB Securities equities research analyst Winson Ng.

       Meanwhile, credit card receivables are expected to revert to pre-Covid 19 growth levels of low single digit rates, added Ng.

       Any rise in banks’ cost of funds has been moderated by their improved current account savings account (Casa) ratios, following very healthy growth in low cost deposits since early 2020, said RHB Investment Bank head of regional equity research Alexander Chia.

       Banking system loan growth decelerated rapidly between June and August 2021, impacted by the nationwide MCO; the moderation in loan growth to 2.49% in August 2021 was mainly due to very weak demand from businesses.

       Lending to the non-household segment, which saw a healthy start in the Q1’21, had slowed down in Q2’21 as the new wave of Covid-19 infections led to uncertainty among businesses.

       The gradual relaxation of mobility restrictions in September saw a healthy rebound in non-household loans to 2.55% y-o-y and system loans to 2.94% y-o-y.

       Provisions rose to a multi-year high of 1.89% of banking system loans in September 2020 but decreased in December 2020 to 1.69%.

       This resulted in banks continuing to set aside additional provisions against potential credit losses in the first half of 2021.

       Uneven recovery across the different economic sectors has been a concern among factors that can dampen economic recovery.

       However, repayment assistance on loan and financing facilities, and various other relief assistance by banking institutions have helped keep banks’ gross impaired loan ratio well-controlled.

       Additional support for SMEs such as providing corporate income tax rebate and job support schemes would further help businesses to capitalise on new opportunities and facilitate their shift towards the digital economy.

       The greatest risk to earnings recovery is a resurgence of Covid-19 infections.

       As we walk on this ‘tightrope,’ it is imperative that every care and early preventive steps be taken in our daily fight with this deadly virus.Yap Leng Kuen is a former StarBiz editor. The views expressed here are the writer’s own.