The June 21 banking system data released by Bank Negara Malaysia showed pronounced impact from the third movement control order (MCO) mainly in consumption with both credit card spend and overall loan applications decelerating. While the negative impact of the lockdown on asset quality was somewhat expected, Macquarie Equities Research (MQ Research) continues to believe that the risk remains skewed to the non-consumer book especially small and mid-size enterprises (SMEs) while consumer assets should rebound post lockdown.

Two Months in Lockdown: Starting to Bite

• The third national lockdown (movement control order), MCO3.0 which began on 5 May, had a pronounced impact on the banking stats in June. Credit card spend fell 19% m/m in June, to roughly 28% below pre-Covid levels. This is still not as drastic as the 51% drop seen in April 2020. Overall loan applications decelerated 12% m/m in June, with consumer loan applications down 19% m/m vs non-consumer relatively flat at 2.7% m/m.

• Lockdowns may have played a role in physically preventing consumers from facilitating loan applications. However, it is worth noting that applications for big-ticket items fell much more than discretionary borrowing: Residential property loan applications fell 18% m/m, while automotive loan applications fell 50% m/m. Credit card and personal loan applications were flat m/m. Meanwhile, applications of working capital loans grew 5%, during a lockdown, indicating businesses were still looking for liquidity.

• Loan repayments are an early indicator of asset quality stress. Overall, repayment levels dipped 1.9% in June, with a disproportionate drop in consumer loan repayments (-12% m/m). Using historic repayment trends, MQ Research estimates the consumer loans-at-risk has increased from 10%-11% (pre-lockdown) to ~20% in June. Note, however, that consumer loan disbursements decelerated even more rapidly, -27% m/m. While the automatic loan moratoriums had not yet been introduced (only beginning on 7 July), MQ Research anticipates the banks would have already begun to extend targeted repayment assistance to distressed borrowers. With the repayment assistance structure in place however, said loans-at-risk are unlikely to be impaired in the short term. At the same time, it will also artificially lift consumer loans growth, which rose +5.2% y/y in June.

Liquidity Decelerates, Still Elevated

• Liquidity in the banking system remains ample, with loan-to-deposit ratios hovering at 88% and current account savings account ratios at a record high 32%, supportive of lower cost of funds in 2Q21 and better net interest margins. Deposit growth (+3.9% y/y) has begun to converge on loans growth (+3.4% y/y). Liquidity coverage ratios rebounded to 149% (May: 137%). The loan loss coverage ratio remains healthy at 112%, while CET1 ratios of 14.2% remain sufficient.

Outlook

• The negative impact of the lockdowns on asset quality was somewhat expected, with a ~10% increase in potential repayment assistance in consumer loans. However, with resilient labour market conditions, MQ Research reiterates that risk remains skewed to the non-consumer book, particularly small and mid-size enterprises (SMEs). Consumer assets should rebound post-lockdown.

Source: Macquarie Research - 3 Aug 2021