More manageable opt-in moratorium for banks
THE second round of the global loan moratorium should be less painful and more manageable for banks.
This time around, as borrowers must choose to take advantage of the deferral of payment, there is a good chance that fewer individuals and businesses will participate in the moratorium.
Therefore, this should lead to a decrease in modification losses and the impact on interest income may not be as large as last year.
While the extended movement restrictions may weigh on the sector’s near-term earnings outlook and, therefore, sentiment on bank stocks, analysts do not expect a repeat of the bank stock sell-off like the year last.
In fact, some analysts expect bank stocks to benefit from the market rally in the second half of 2021.
Kenanga Research analyst Clement Chua recommends “buying on weakness” when it comes to bank stocks.
He points out that last year’s first loan moratorium cost the banking sector around RM6.4 billion, from modification losses and repayment assistance.
“That said, we think there should be less pain (under the latest moratorium), given that most accounts and risk sectors have already opted for relief measures the previous year.
“Also, as the moratorium this time around is on an opt-in basis, it is likely that attendance would not be as large as last year, possibly resulting in much more change losses. weak.
“Nonetheless, this could lead to the need for additional provisioning by banks in anticipation of deteriorating asset quality over time. As such, we do not rule out the possibility of a downward revision of corporate guidelines, ”he said.
Following the recent announcement of a general moratorium, Kenanga Research also cut its loan growth forecast to 3% to 4% for 2021, down from 4% to 5% earlier.
This is based on a prolonged lull in economic activity impacting personal spending.
The six-month loan moratorium, announced as part of the National People’s Welfare and Economic Recovery Program or Pemulih, applies to all credit facilities, including hire-purchase and housing finance , but not credit cards.
Credit facilities must be approved by July 1 and are not expected to be more than 90 days past due at the time the moratorium request is submitted to the bank.
For credit card facilities, banks will offer to convert the outstanding balance into a three-year term loan with reduced interest rates to help borrowers manage their debt.
Small and medium-sized enterprises can also take advantage of the moratorium on loans, but it is subject to review and supervision by their banks.
Even though all borrowers agree to the loan moratorium, MIDF research manager Imran Yassin Md Yusof (pictured) told StarBizWeek that banks will generally be able to handle the impact.
However, the impact will be different from one bank to another and those with larger balance sheets will be better able to minimize the impact.
He stresses that banks will still be able to recognize interest income, despite payment deferrals.
“The concern, however, is the liquidity of banks because cash flow can be affected.
“However, we understand that Bank Negara will provide liquidity support.
“Also, with the repayments and other initiatives at Pemulih such as withdrawals from the employee contingency fund, liquidity is unlikely to be an issue and we could see the growth of the current account and the savings account remain robust. “, did he declare.
Imran also does not foresee any impact on the terms of the loan due to the moratorium.
He explains that the arrangements made by banks last year were “more of an overlay” and were based on individual banks’ assessment of the outlook and the pandemic, rather than just the moratorium on lending.
In addition, during the loan moratorium period, loans will not be classified as impaired and there will be no need to provision them.
“The impact will be on the Net Interest Margin (NIM), but we also have to keep in mind that banks can still recognize interest income even if they don’t receive any repayment.
“The impact on NIM will be on loss modification where banks will have to account for the difference between the present value of cash flows received and the original cash flows.
“It came from hire purchase and Islamic fixed rate loans.
“However, given that we believe borrowers taking the second round of the loan moratorium will likely need to sign an addendum to their loan agreements, we believe banks will likely revise certain conditions to match the cash flow of the value. current, ”he says. .
As a result, the change loss is likely to be smaller this time around, and as a result, bank fundamentals, including their capital buffers, will remain intact.
With banks better equipped to navigate the new loan moratorium and investors able to better assess the impact on the banking sector, Imran believes there will be no liquidation of bank stocks like last year.
“In addition, the situation is different because we now have the vaccination program and a more positive outlook for the reopening of the economy,” he says.
Echoing a similar point of view, another analyst says the impact of the moratorium on lending on bank stocks will be contained.
“We saw how the banks reacted the last time around in response to the crisis and the moratorium, and it made us see more clearly that banks are resilient despite the impact.
“Last year, 85% of borrowers resumed their payments after the end of the first moratorium cycle. This shows that this time not all will resort to the loan given the opt-in mechanism.
“Thus, the impact on the finances of banks should be limited and I see no reason that would trigger a liquidation of bank stocks,” he adds.
Meanwhile, UOB kay Hian Malaysia Research says the current consolidation phase of the banking sector offers a great opportunity for investors to accumulate on weakness.
“The current one-time valuation is -1.5 standard deviation from its historical five-year average, which is attractive.
“We do not believe that the current foreclosure poses a major upside risk to provisions, as banks have generally built in sufficient preventive provisions for vulnerable groups who are more likely to be affected by the foreclosure,” while a more rapid deployment of Covid -19 vaccinations in the second half of 2021 should help stimulate economic recovery, ”he says.
The research house also points out that the current risk-return balance of bank stocks is attractive.