By Leong Hung Lee, The Star

Loan moratoriums and restructuring pose critical risks to the banking systems in Asean including Malaysia and need to be watched going forward, according to Maybank Kim Eng Research.

The research house said loan moratoriums and restructurings across Asean have muddied the waters on asset quality risks.

“Just 10% of such loans going bad could have a material impact on non-performing loans (NPLs) especially in Indonesia, Thailand and Malaysia, but also in Singapore and the Philippines. This is a critical risk that needs to be closely watched, ” Maybank said in a report.

As part of extraordinary Covid-19 relief measures, many regional banking systems have placed loans on moratoriums where interest and/or principal payments are paused. These loans are not classified as NPLs.

“This leads to a shadow asset quality risk, we believe. Thailand, Indonesia and the Philippines banking systems have the highest proportion of restructured/moratorium loans, our data reveal, ” the research house said.

“In our coverage universe, should 10% of these loans ultimately get classified as non-performing, Indonesia (+66%), Malaysia (+43%), Thailand (+31%) could see the highest growth in NPLs versus forecast FY21E levels. Singapore (+29%), the Philippines (+26%) also have sizable risks, ” it added.

In such a scenario, Maybank forecasts material increases to gross NPL ratios in Indonesia, the Philippines and Thailand, which will ultimately have a significant profit and loss impact by way of higher credit charges.

Maybank noted that through FY20, banks have been bulking up provisions, with loan loss provisions (LLP) coverage near or exceeding 100% in most markets.

It added LLPs could fall 100 percentage points (ppt) in Indonesia and 33ppt in Malaysia. In the rest, it could fall between 14 and 23ppt.

Regionally, Maybank expects pre-provision operating profits to improve in 2021E, largely driven by improvements in loan growth as economic activities strengthen and countries open up.

“At the same time, we expect non-interest income to also see some recovery compared to the lockdown periods in 2020, particularly in banks with strong wealth management and fund management franchises as well as trading income, ” it said, adding that it forecast economic growth to deliver positive readings in 2021E compared to mostly contractions in 2020.

From a valuation standpoint, Maybank said the sector regionally has been lifted up from deep value territory following the recent rally.

Its top picks are Hong Leong Bank, RHB, Kasikornbank, TISCO Financial Group, DBS, OCBC, VPBank, Techcombank, Bank Mandiri and Bank BJB.

On Malaysia, Maybank said its economics team did not foresee any more rate cuts into 2021E.

“Hence, we have imputed a recovery in net interest margins (NIM). Positively though, the banks have amassed sizeable FVOCI (fair value through other comprehensive income) reserves, bolstered by unrealised investment gains, that could be partially realised to support earnings in 2021.

“Bank Negara’s stress test projects a rise in the banking system’s gross impaired loans (GIL) ratio to 3.1% end-2020 from 1.6% end-June 2020 and to 4.1% in 2021. As a result, credit costs are expected to remain elevated into 2021.

“We expect ROEs to improve to 8.6% in 2021E, but will continue to trail the average of over 10% in 2019, unless earnings growth is much stronger than what we are projecting currently, ” it said.

Source: The Star