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KUALA LUMPUR (May 4): Over the weekend, heated debates erupted over whether banks should charge additional interest on deferred payments for fixed-rate financing loans, including rental purchase, during the automatic moratorium period on six months.
On Saturday (May 2), Finance Minister Tengku Datuk Seri Zafrul Aziz suggested that financial institutions waive any accrued interest or profits imposed throughout the moratorium.
A day later, the government-owned Agrobank, which is under the purview of the Minister of Finance Inc, announced that it would do exactly that for all eligible small and medium-sized business (SME) customers during the six-month moratorium period.
Should other banks do the same? What will be the implications for banks if they do?
A seasoned bank analyst who declined to be named said that fixed-rate financing loans represent approximately 20% of the total value of the banks’ loan, as most loans are variable-rate loans.
And based on exposure to auto loans, he said Affin Bank Bhd and Public Bank Bhd will be the hardest hit if the additional earnings charge on fixed-rate financing materializes. However, he believes the effect will be minimal, compared to banks’ overall performance.
Therefore, banks generally have the financial capacity to absorb such an exemption, although they will have to incur modification losses on their books at a later date, he added.
Similarly, MIDF Amanah Investment Bank analyst Imran Yassin Md Yusof is of the opinion that such an exemption will not have a significant impact on banks’ earnings.
“One thing we must recognize is that the benefit charged here is additional since the principal is not reduced during the moratorium. Second, the [banks’] part of the fixed loans is less compared to the variable rate loans, ”Imran said.
In addition to Affin and Public Bank, AMMB Holdings Bhd (Ambank) is another local bank with a higher ratio of fixed-rate loans to total loan exposure, according to a research note released today by CGS-CIMB analyst Winson. Ng.
Ng, however, also said that banks with higher fixed rate loans may have better results in maintaining their net interest margin (NIM), should there be another 75 basis point cut in the interest rate. of the night (OPR), which would bring the full year rate reduced to 125 bp.
“Among the banks under our coverage, profit cuts were the smallest for three banks, with an average reduction in net earnings for fiscal year 20-22F of 5% for AMMB, 6.5% for Public Bank and 7.2% for Affin Bank. [This was] mainly due to the fact that, in our assessment, OPR cuts would have the least impact on the net profit of these banks, compared to their peers. [This was] primarily due to relatively lower floating rate loan rates for these banks, compared to most of their peers, ”wrote Ng.
Should banks decide to forego these additional earnings charges, it would be a laudable move, as it will provide consumers with breathing space by reducing their financial burden, said RHB Research Institute chief economist Asean Peck Boon Soon.
However, don’t expect there to be a boost to private consumption from such a move, Peck said, as fears of leaving, along with concerns about job security, will continue to affect consumption.
Executive Director of the Socioeconomic Research Center, Lee Heng Guie, agreed with Peck’s point of view, adding that job prospects have not been promising, as the number of people reporting job losses and seeking help Under Socso’s Employment Insurance Scheme (EIS) it increased substantially in March, even before the Motion Control Order (MCO) was implemented to contain the spread of Covid-19.
And post-MCO recovery of consumption may take some time, especially since there may now be a structural change in spending behavior due to the “new normal” of social distancing that merchants have to adapt to.
The true test of the economy is when the loan moratorium period ends and borrowers must resume repaying their loans, Lee said.
