Bank Negara Malaysia has officially announced an automatic moratorium on loan and interest repayments (for a period of 6 months) which, will be granted to SMEs and individuals during the Covid-19 outbreak, effective 1 April 2020. In our view, the impact will be negative on banks during this ‘6-month period’ as it will put a strain on its liquidity and working capital, which is also needed to cover interest expense, overheads and to extend lending activities. Nonetheless, as a relief for banks, the Net Stable Funding Requirement (NSFR, lowered to 80%) and the Liquidity Coverage Ratio (LCR, below 100%) for banks could be relaxed. Our system liquidity ratio remains healthy at 151% and our banks would have sufficient liquidity to maintain its role as a financial intermediary. Maintain UNDERWEIGHT with ELK-Desa as our top pick.

BNM Introduces More Relief Measures for Individuals and SMEs

Based on BNM’s official announcement, banking institutions in Malaysia will grant an automatic moratorium on loan and interest repayments (for a period of 6 months, for RM-denominated loans, except for credit card balances) for individuals and SMEs during the Covid-19 outbreak. This automatic moratorium (effective from 1 Apr 2020) is not applicable to loans/financing in arrears exceeding 90 days (as at 1 Apr). Though it alleviates borrowers who are facing cash-flow constraints, interest on outstanding balances will continue to accrue.

Other Options - Credit Card Balances Loan Conversion; Restructuring

Meanwhile, additional measures proposed include an option to convert outstanding credit card balances into a term loan (at not more than 13% p.a.). For borrowers still having difficulty to resume payments after the moratorium is over, banks may have to provide options of a loan restructuring and rescheduling.

Liquidity Ratios Are Relaxed for Banks During the Moratorium

In our view, these could potentially be pre-emptive measures anticipating that the movement control order (MCO) will potentially be extended and that cashflows of many individuals and SMEs will be affected. Nonetheless, to ease liquidity constraints which banks may potentially face, the minimum NSFR is now lowered to 80% (and to revert to 100% from 30 Sept 2021) while banks would be allowed to operate below the minimum LCR requirements of 100%. We believe that during this, banks will be allowed reasonable time to rebuild their buffers should there be severe constraints. This means raising more long-term funding and building up its stable deposit base. As a result, this will put further pressure on its funding cost and NIM.

Source: Affin Hwang Research - 25 Mar 2020