KUALA LUMPUR: The emergence of bad loans in the banking system is expected to be delayed into the first half of 2022 (H1’22) with the reintroduction of the six-month blanket loan repayment moratorium.
RAM Rating Services Bhd (RAM Ratings), in a statement, noted that a sizeable proportion of loans were under relief.
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.
This figure may creep up in the coming months, said RAM Ratings, although it highlighted that the number of applications has already slowed in recent weeks.
The six-month moratorium – 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 also already available prior to this.
“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,” said RAM Ratings co-head of Financial Institution Ratings Wong Yin Ching in conjunction with the publication of its Banking Quarterly Roundup Q2 2021 report. “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.
The rating agency noted that all eight banks had posted higher year-on-year (y-o-y) pre-tax profit in Q2 2021, largely due to a low base effect. On a quarter-on-quarter (q-o-q) basis, the performance was mixed.
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 2021: 2.33%; Q2 2020: 1.83%), but the q-o-q improvement was modest (+2 bps) as most deposits had already been repriced lower by Q1 2021.
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,” RAM Ratings said.