A plan by Malaysia to waive three months of interest for low-income borrowers hit by the COVID-19 pandemic would potentially shave as much as 20% of banks' profits in 2021 and drive up credit costs, S&P Global Ratings said.
The proposal, currently being discussed by the Southeast Asian nation's Parliament, would require banks to exempt the bottom 50% of individual borrowers in terms of income from paying interest on loans in the quarter ending Dec. 31. The move, according to Ratings analysts, could result in a profit loss of at least 20% for banks from pre-COVID-19 levels in 2019 under a worst-case scenario. It could also hinder banks' ability to operate commercially as such borrowers account for 30% of their loan books.
"We believe the interest waiver reflects increasing rates of negative government intervention, commercial rounding of local banks and also a threat to the credit culture of the local banking industry," Nancy Duan, associate director of financial institutions ratings in South and Southeast Asia, said at a Sept. 29 webinar.
The comments came after Ratings cut its economic growth forecast for Malaysia in August due to a severe pandemic wave in the second quarter and subsequent lockdowns. It expects GDP to grow 3.2% in 2021, compared with its previous estimate of a 4.1% expansion. For 2022, the agency now expects GDP growth of 6.0%, versus 6.3% previously.
The country faces continued pressure on its fiscal settings given its near-term economic outlook amid a worsened domestic COVID-19 situation and a fluid political backdrop, Ratings said. It revised the economic trend for Malaysia under its Banking Industry Country Risk Assessment to negative from stable on rising downside risks.
On Sept. 23, the agency affirmed its credit ratings on the Southeast Asian country's five largest lenders — CIMB Bank Bhd., Malayan Banking Bhd., Public Bank Bhd., AmBank (M) Bhd. and RHB Bank Bhd. — with a negative outlook.
On the asset quality front, Ratings said gross nonperforming loan ratio of Malaysian banks, in aggregate, may rise to between 3% and 4% in 2022, from 1.7% in July. Credit costs may rise 55 to 60 basis points. "Delayed economic recovery, repeated moratorium distortion and negative government intervention in earnings/operation threaten to materially erode the buffers Malaysian banks had before the pandemic," according to the rating agency.
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