Credit costs expected to begin normalising in H2

PETALING JAYA: Banks are likely to see continued downward pressure on earnings in the first half of 2021, although the impact could be less severe than last year.

The more contained impact is partly due to the front-loading of provisions by banks in 2020, according to Bank Negara in its Financial Stability Review for Second Half 2020.

“Improvements in the domestic and global economy, coupled with continued support measures and the operational capacity of banks to engage and assist borrowers in distress, will further help sustain debt serviceability and support bank earnings, ” it added.

Last year, banks’ pre-tax profit declined by 24.8%, marking the biggest fall since the 1997 Asian Financial Crisis.

Weaker credit risk outlook following the Covid-19 outbreak and the uncertain economic recovery prospects raised the banking sector’s credit costs further by 78 basis points for the full year of 2020, and as a result, weighed down earnings.

In line with weaker bank earnings throughout 2020, returns on equity and assets of the banking system declined to 9.2% and 1.1%, respectively.

Looking ahead, Bank Negara said the cautious credit risk outlook will continue to weigh on banks’ profitability. “Credit costs are expected to begin normalising in the second half of 2021 following banks’ preemptive provisioning in 2020, ” it added.

Amid the challenges seen last year, Bank Negara said the capitalisation of the banking system remained strong, bolstering banks’ capacity to absorb potential shocks and support economic recovery.

As at end-2020, the banking sector’s total capital ratio was 18.5%, higher than 2019’s average of 17.9%. The aggregate excess capital buffers amounted to RM126.7bil.

“Banks have sought to preserve their buffers in anticipation of higher credit losses going into 2021, by lowering dividends to shareholders, implementing dividend reinvestment programmes and raising new equity.

“Some banks also issued additional Tier-1 and Tier-2 capital instruments, replacing Tier-2 capital instruments that were being phased out as regulatory capital under the Basel III transitional arrangements, ” it said.

Banks also continued to record healthy liquidity positions throughout the second half of 2020, with the aggregate banking system Liquidity Coverage Ratio recorded at 148.2%.

This was supported by the resumption in loan repayments by most household and small and medium enterprise borrowers since October 2020, following the end of the automatic moratorium on these loans.

It is noteworthy that overall repayments have almost returned to the levels seen prior to the automatic loan moratorium.

“Latest stress tests affirm resilience of the financial system to simulated shocks under more severe economic conditions. Post-shock, banking and insurance sectors maintain capital levels well above regulatory minimum.”