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Malaysia: Banking modification losses in focus again
PETALING JAYA: Banks will likely again face another round of modification losses as a result of the automatic loan moratorium that just started, but this time, the losses are not expected to hit them as much as the first time.
According to CGS-CIMB, local lenders which may have to incur modification losses will see a lower quantum of losses than the RM1.58bil last year.
“The modification losses shave 6% off our projected 2021 net profit for banks under our coverage in a worst case scenario,” the company’s research unit told its clients in a report yesterday.
Modification losses happen when changes are made to the terms of an existing loan by a bank to its customer.
A moratorium – which is a temporary halt to one’s loan payments made to the bank –tends to result in such losses.
“The modification losses, if they are incurred, will be treated as non-core costs for banks.
Even if we include the worst-case scenario in our earnings forecasts, we still project a recovery in net profit growth to 2.9% for banks this year versus a decline of 10.8% last year (excluding the one-off items from AMMB Holdings Bhd
), which is the potential re-rating catalyst that underpins our ‘overweight’ sector call,” said CGS-CIMB.
In an earlier report, Maybank Investment Bank’s (Maybank IB) research unit said with the loan moratorium in place, loans under the country’s second-largest bank CIMB Group Holdings Bhd’s payment relief assistance (PRA) segment are likely to rise.
“While the risk of higher provisions is tilted to the upside, we think that incremental provisioning may not be significantly higher than guidance if loans under PRA do not exceed 20%,” Maybank IB said.
It said there will likely still be a modification loss this year for CIMB, but of a smaller magnitude compared to the RM214mil that the group reported last year.
Meanwhile CGS-CIMB said based on its knowledge, none of the banks had provided any guidance on the exact quantum of modification loss but some of them have said that it will be smaller than what was booked in the second quarter (Q2) of 2020.
“So, we take the amount of modification loss for banks in Q2 of 2020 as the worst-case scenario for 2021. Total net modification loss incurred in Q2 of 2020 was RM1.58bil,” it said, adding that the largest was RM498.4mil for Public Bank Bhd while there was a small write-back for Alliance Bank due to its limited exposure to auto loans.
The six-month moratorium for all individuals, microenterprises and affected small and medium-enterprises started on July 7.
Bank Negara said the moratorium was in line with the National People’s Well-Being and Economic Recovery Package or Pemulih implemented due to Covid-19.
In addition to the moratorium, banks will also offer a reduction in installments and other packages.
This includes rescheduling and restructuring financing to suit the specific financial circumstances of borrowers, the central bank said.
Source: https://www.thestar.com.my/business/business-news/2021/07/20/banking-modification-losses-in-focus-again