- Further clarification on latest guideline on treatment of rescheduled and restructured (R&R) loans. Bank Negara Malaysia (BNM) held a discussion session last week on the latest guideline on Classification and Impairment Provisions for Loans/Financing. Recall that under the latest guideline, a rescheduled and restructured loan is to be classified as a restructured and restructured facility in the Central Credit Reference Information System (CCRIS).

- An R&R loan will be classified as such in CCRIS only after an assessment of credit risk – in line with current practices. It was further clarified that these loans will only be classified as R&R after an in-house assessment of the credit risk of the borrower is conducted – this is in line with the current practice. Thus, these loans will not automatically be classified as R&R loans under the CCRIS. The loans are also not necessarily considered as impaired automatically.

- The latest guideline is aimed at smoothening some uneven practices in the industry. The regulator hinted that most banks are already in compliance with the guideline. However there are some uneven practices in the industry, particularly for loans that are in arrears for less than 90 days. The latest guideline is therefore to address some of these uneven practices. The working assumption is there will be likely changes in the credit risk profile for rescheduled and restructured loans. The general expectation is a gradual minor uptick (and not a major upward movement) in impaired loans for the industry as a result of the latest guideline.

- Likely to see some increase in classification of impaired loans for regional operations. While regional operations would adhere to local jurisdictions, banks are expected to streamline the classification at the group level when consolidated. There are expectations that there may be an uptick in regional impaired loans at the group level.

- The guideline is also aimed at addressing some provisioning practices. The guideline is also intended to address differences in the methodology of provisioning of impaired loans. Any increase in loan loss provisioning is expected to be passed through the profit and loss, and not the balance sheet.

- Prudent and positive measure. All in, we now expect some gradual minor uptick in impaired loans and loan loss provision. We reiterate our view that the latest measure is prudent and positive for the industry in the longer term. We maintain our NEUTRAL rating on the sector.

Source: AmeSecurities Research - 11 May 2015