Kuala Lumpur, Malaysia (CU)_According to Fitch Ratings, banks in Malaysia will not return to normal profit levels in 2021, in spite of the lower credit costs compared to other Asia Pacific countries. According to Fitch Ratings Singapore director Willie Tanoto, the continued elimination of debt relief would trigger non-performing loan (NPL) levels to hit 2.6 percent by the end of 2021.
According to Fitch Ratings’ statement, “Improvement of banks’ profitability is likely to be limited in 2021 as loan impairment charges remain high. We believe banks’ credit costs in 2021 will approach 2020’s level as loan-loss coverage ratios remain low relative to our projections of the NPL ratio, notwithstanding general provisions set aside in 2020”.
The report said, “Visibility into banks’ asset quality continues to be clouded by repayment assistance programs and fiscal relief; we estimate total loans under repayment deferral to account for 11 per cent of the six major banks’ portfolios as of February 2021. However, clarity should gradually improve as most of these programs roll off in the coming months”.
Malaysian banks, according to Tanoto, must focus to resolve issues related to loan. He said, “However, their loss-absorption buffers remain adequate as banks’ capitalization are supported by continued core profitability and subdued balance sheet growth in the near term”. According to the report, the system’s non-performing loan (NPL) ratio increased steadily after the six-month automatic loan repayment moratorium ended, with the household sector accounting for 85 percent of the rise. Malaysia was already under lockdown in the first quarter of 2021, so this is likely to rise in the coming months.
According to Fitch Ratings, from September 2020, the unemployment rate and Covid-19 cases in the country have increased, indicating that economic uncertainty has increased. The report said, “This marred visibility into banks’ asset quality, which prompted most of the six major banks to increase credit provisions in the second half of 2020 relative to the first half. This improved loan loss coverage to 105 per cent of non-performing loans (NPLs) — 80 per cent by end of 2019 — most of which came in the form of general provisions”.
The report said, “Nevertheless, banks’ collective credit costs in 2020 remained the lowest among the Asian Pacific’s emerging markets. Banks’ NPL ratios were suppressed by the moratorium and we project the system’s NPL ratio to rise to 2.6 per cent by end-2021. This means that major banks’ credit provisions will remain high in 2021 and similar to the level in 2020”.
Despite the economic recovery, the study predicted that profitability would not improve dramatically in 2021, as sales growth would be stifled by anemic loan growth and only a minimal rise in the lending margin. After the relief programs expire, the rise in NPLs will lift credit impairment charges above the pre-pandemic average, affecting the profit recovery in 2021.