BNM: Higher provisions in banks as borrowers face new stress
KUALA LUMPUR (September 29): Bank Negara Malaysia (BNM) said the country’s banks plan to continue strengthening loan loss provisions in the second half of 2021 (2H21) given the renewed strains some borrowers face.
According to the BNM’s Financial Stability Review for 1H21, which was released on Wednesday, September 29, banks are bracing for an increase in loan defaults and have continued to set aside provisions against the materialization of potential credit losses when the support measures will eventually be lifted.
“In addition, in a simulated scenario of a prolonged economic downturn and no policy intervention, banks are expected to remain resilient even as companies [loan] depreciations were expected to reach up to three times the current level by the end of 2022, ”the central bank said.
The BNM said that banks ‘loan loss provisions are expected to decline with the return to more targeted loan repayment assistance as well as a greater ability of banks to differentiate borrowers‘ loan repayment capacity as loans become more efficient. Large-scale repayment assistance measures are being phased out.
Loan growth is also expected to improve as Covid-19 containment measures are relaxed alongside the progress of national vaccination programs, according to the BNM.
“This will provide additional support to [banks’] profits, ”BNM said.
According to the BNM, the expansion of loan repayment assistance in November 2020 and again in June and July 2021 kept the depreciations of the country’s banking system at low levels, with gross and net bad loan ratios remaining stable. at 1.6% and 1% of total loans. respectively.
Despite this, banks have continued to increase loan loss provisions throughout 1H21 in anticipation of deteriorating asset quality as loan repayment assistance programs are gradually unwound, the Bank said. BNM.
“Total provisions are now around 54% higher than the pre-pandemic level at the end of 2019 and increased further to reach 1.8% as a percentage of total loans at the end of June 2021 (2020: 1, 7%; 5-year average: 1.3%).
“The loan loss coverage ratio (including regulatory reserves) has remained at historically high levels at 129.2%,” BNM said.
Globally, BNM said most of the overseas operations of domestic banking groups have seen improved profitability, mainly due to lower loan loss provisions built in 2021 compared to 2020. .
In particular, the operations in Singapore, which are the most important, recorded a strong recovery in parallel with the resumption of economic activities, with Covid-19 infections having been effectively contained.
“The results of operations in Indonesia and Thailand were also supported by a lower increase in provisions for impairment. The overall performance of overseas operations, however, was weighed down by operations in Hong Kong, mainly due to high credit risk.
“Improving profits from their domestic and foreign operations has allowed banks to preserve healthy capital buffers. This has allowed some banks to cautiously resume dividend payments that had previously been suspended or reduced to conserve capital,” although a number of banks have kept dividends in place, reinvestment programs to protect their capital reserves given the lingering uncertainties over the outlook for the economy, ”BNM said.