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RAM Ratings: Interest Waiver To Hit Banks’ Earnings But No Immediate

The three-month interest waiver proposed by the Ministry of Finance (MOF) recently for loan moratorium recipients under the Pemulih relief programme will impinge on banks’ earnings recovery this year. The move will apply to individual borrowers in the bottom 50% (B50) income bracket. RAM Ratings does not however expect the waiver per se to trigger immediate adverse rating action in respect of its portfolio of domestic banks.

“The interest exemption from October to December 2021 for B50 borrowers will erode the 4Q 2021 earnings of banks although they are still anticipated to turn in a profit for the full year,” says Wong Yin Ching, RAM’s co-head of Financial Institution Ratings. “While those with a greater loan exposure to the lower income group will be more severely affected, this is unlikely to be a threat to banks’ capitalisation on the whole. Troubled credits are presently obscured by forbearance measures but bad loans are envisaged to rise as relief programmes are gradually phased out. Banks need to preserve their capital to cushion against expected higher credit losses,” she adds.

The three-month interest waiver for B50 borrowers is in addition to the six-month loan repayment moratorium under the Pemulih fiscal package implemented on 7 July 2021 for all individual, microenterprise and small and medium enterprise borrowers on an opt-in basis. Prior to the MOF announcement, about 26% of the eight anchor banking groups’ domestic loans were under relief based on data shared during the most recent bank result briefings in late August. The bulk of the individual borrowers had chosen the deferment of repayments as opposed to reduced instalments. Interest will continue to accrue on all relief loans, save for the abovesaid B50 loans which, under the recent proposal, may be exempt from interest for three months.

The impact of the interest waiver is difficult to assess at this time as banks await further clarity on this latest relief measure in terms of scope and eligibility. The definition of B50 is still unclear. As a rough proxy, borrowers earning less than RM5,000 per month are estimated to account for around 18% of total loans in the banking industry. Assuming all B50 borrowers apply for relief, the loss in interest income for the commercial banking sector could amount to an estimated RM3.5 bil in 2021. This earnings hit has not taken into consideration the modification charges that banks will also have to incur arising from the Pemulih moratorium. RAM will continue to monitor this development closely and reassess any impact as more information becomes available.