Malaysian banks have recently agreed to waive ‘extra charges’ on hire purchase (HP) loans during the six-month moratorium period following an ‘urge’ from the Finance Minister. While this is good for the rakyat, especially those from the B40 and M40 groups, Macquarie Equities Research (MQ Research) thinks this is a major negative event for Malaysian banks’ earnings and valuations.

Which banks will have the highest risk from this move?

Key Points

• Following Ministry of Finance ‘urging’, banks have agreed to waive ‘extra charges’ on HP loans during the moratorium; MQ Research estimated RM4.1bn income hit, -14% FY20E NP.
• Investors may be wary of the government applying moral suasion to redirect bank profits to fund policies; negative for valuations.
• Bank Negara released banking system data for March 2020; system loans growth rebounded to 4% y/y, while non-performing loans (NPLs) continued to rise to 1.6%.

Hire-purchase Loan Risk Materialises

• The decision by banks to forego “additional charges imposed during the moratorium period” (link) is a major negative event for Malaysian banks’ earnings and valuations. MQ Research estimates banks will forego RM4.1bn in revenue and profit before tax, resulting in an aggregate (after-tax) hit of -14% to FY20 net profit (NP). Based on feedback from domestic and foreign clients, this development would be perceived as negative to valuations – setting a precedent that the government may tap corporate coffers to fund policies. Keep in mind no explicit statutory tools were used to achieve this outcome but rather moral suasion. MQ Research expects it will not be taken well by foreign investors, especially when compounded by the downside risk to dividends. A combination of high exposure and high foreign shareholding makes Public the most vulnerable, in MQ Research’s view.

• This event has parallels with the government’s move to halve broadband prices in 2018, which resulted in a RM676m hit to Telekom Malaysia’s revenue and a -55% reduction in core profits. A key similarity was the use of moral suasion to achieve policy goals, given lack of direct statutory tools. On a positive note, MQ Research expects the banks will be actively engaging with the government for some relief (e.g. tax breaks) for agreeing to forego the income.

March Bank Stats

• March loans growth saw a rebound to +4% y/y, led by working capital demand (+3.6% y/y vs 0% y/y growth in Feb). Special relief fund (SRF) disbursements should keep working capital loans growth robust through April as other loans growth drops precipitously in April due to Covid-19 lockdown. While overall deposit growth was steady, current account savings account (CASA) ratios spiked as CASA and deposit growth diverged – a trend last seen during global financial crisis.

• Following the double rate cuts in Jan and March, interest margins saw a decline to 362bps. Asset quality continued to deteriorate, but only incrementally, to 163bps (the recent high of 193 bps in Oct 2018). However, loan loss coverage ratios fell sharply to 82%, a potential cause for concern as NPLs are expected to continue rising. Nonetheless, the banking system remained liquid, with an 88.7% loan-to-deposit ratio and 141% liquidity coverage ratio. Furthermore, banks capital buffers remain close to historic highs at a 13.9% common equity tier 1 ratio.

Outlook

MQ Research expects short-term volatility on the downside as the market digests implications of the foregone HP income; losses will only be booked in 2Q20, leaving room for speculation and uncertainty. AmBank, Public and Maybank have the highest risk to NP, with Public and Maybank the highest risk to valuations. MQ Research reiterates CIMB and RHB as its top picks (read here); both have the smallest HP exposures (est. 10% and 7% risk to NP).

Source: Macquarie Research - 8 May 2020