Portfolio Lead Advisory Services Weekly Digest - Edition 18

With recent rise of COVID-19 cases, the Malaysian government imposed a two-week Conditional Movement Control order in the federal territories of Kuala Lumpur and Putrajaya, and Selangor state effective from 14 October to avoid a second nationwide outbreak and lockdown which would lead to an even greater level of stress for the country’s economy and society.

Recent statistics from Bank Negara Malaysia (BNM) shows that Malaysia’s GDP has shrunk by 17% in Q2 2020, the worst contraction since the Global Financial Crisis in 2009. With the ongoing uncertainty around the timing of global recovery, the World Bank has recently revised its forecast for Malaysia’s economic growth in 2020 to -4.9%. The operating environment for Malaysia’s banks is becoming more challenging as economic conditions remain weak and fragile. The top 5 banks in Malaysia reported lower net interest margins in Q2 compared to the same period in 2019 due to reduction in interest rates, and additional provisions set aside for the expected increase in impaired loans. Provision levels have surged across big banks with Maybank and CIMB recording significant year-on-year increases by 171% and 138% respectively in Q2. Loan growth picked up to a 14-month high at 4.5% in July amid the attractive low interest rate environment stimulated by policies. However, “real” lending is likely to have reduced due to credit appetite and capital uncertainties.

A number of measures have been introduced by the government to support individuals and businesses including a six-month blanket moratorium on loans/financings effective from 1 April to 30 September, with targeted extension and loan repayment flexibility after 30 September. According to BNM, banks have already received 500,000 applications for extension on the repayment help scheme. The moratorium measure, on one hand, buys time for borrowers to improve their financial positions and to some extent lowers banks’ peak NPL numbers. However, on the other hand it poses a great downside risk of deferring recognition of problem loans. We should expect to have greater clarity over the bank’s real asset quality as the moratorium unwinds. S&P expects the cumulative credit losses for Malaysian banks over 2020-2021 to increase to about 128bps.

BNM reports an overall NPL ratio of 1.4% and a total NPL stock of $6.1bn in Q2, of which manufacturing has the largest exposure (due to the sector being severely impacted by the movement control order imposed by the government), followed by household loans. Until recently, Malaysia did not have an active portfolio sale market since the mid-2000s. Nonetheless, with a well-established regulatory and legal framework to support the secondary distressed debt market, and if combined with loosening of foreign investor restrictions should the regulators allow, could make this an interesting NPL market in the near future.

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