KUALA LUMPUR: Easing restrictions may support loan growth following a flattish month-on-month (m-o-m) July as a result of lockdown measures and a new round of loan moratorium.

However, banks are cautious on the possibility of deteriorating asset quality amid the prolonged economic recovery.

The stricter lockdown measures, which came into effect in June, had impeded applications, disbursements and repayments. Consequently, total loans for July came in at 0.1% higher m-o-m for both household and business loans.

Additionally, with the introduction of an opt-in blanket moratorium effective July 7, m-o-m loan repayments saw a 2.2% drop (-4.7% in household and -1.5% in businesses) as individuals cling on for more cash liquidity, said Kenanga Research.

The research house also pointed out that loan applications for July declined 28% year-on-year (y-o-y) and 15% m-o-m due to the above mentioned reasons.

Households and businesses continue to face severe difficulties in seeking out loans as the trying business climate may have disincentivised further operations.

This has cascaded to lower loan approvals of -16% y-o-y and -11% m-o-m.

Year-on-year, July’s system loans increased by 3.1%, mostly from household loans (+4.2%) to fuel private vehicle and property purchases.

Business loans, meanwhile, grew by 1.7% as various sectors saw mixed restrictions which made operations and expansion difficult.

“July’s numbers reflect the prevailing damage that movement controls and restrictions could inflict on the overall economy and could lead to a compounding impact if they are extended excessively.

“As far as August is concerned, we believe there will be some relief given some loosening of such measures, but much more could be needed to demonstrate a meaningful improvement.

“In unison, all banks are anticipating some headwinds in asset quality and hence forewarned the need for more impairments,” Kenanga Research said in a report yesterday.

In July, total impairments reported a 20% y-o-y growth, heightened by both household (+37%) and business (+11%) loans.

According to the brokerage, household defaults are likely stirred by those with lost income sources while businesses suffered due to unsustainable operating environments that impeded sales.

In terms of gross impaired loans (GIL) ratio, the month registered at 1.67% (+5 basis points or bps m-o-m) with households coming in at 1.18% (+7 bps) and businesses at 2.36% (+1 bps). “However, banks are continuously keeping their buffers high, coming in with a loan loss coverage ratio of 111.5% (June 2021: 111.9%, July 2020: 95.5%) in the event of further worsening

“That said, with the rate of vaccinations on the rise, we are hopeful that the number of new daily Covid-19 cases will gradually reduce to a more economy-friendly level by the fourth quarter and that would give us the necessary kicker to boost confidence once more,” it said.

For now, Kenanga is sticking to its 2021 system loans growth expectation of 3%-4% with the steady reopening of economic sectors once all states migrate to Phase Two of the National Recovery Plan.

Meanwhile, TA Securities was slightly more positive, leaving its 2021 loan growth assumption intact at 5.2%.

While it noted that softer approval and application in June and July may have signalled that demand is normalising, expectations that activities should pick up by the fourth quarter will help prop up its forecast.

https://www.thestar.com.my/business/business-news/2021/09/02/easing-restrictions-likely-to-support-loan-growth