Moratorium soften economic shock but raise banks' risk

KUALA LUMPUR, April 14 — Regulations will soften the ensuing economic shock from COVID-19, but it would also increase risks for banks, said Moody’s Investors Service.

In a research note today, Moody’s said on March 25, Bank Negara Malaysia (BNM) announced a six-month debt moratorium for borrowers in the retail and small and medium-sized enterprise (SME) segments to help them manage the liquidity crunch from disruptions caused by the novel coronavirus outbreak.

“The debt moratorium will soften the near-term credit-negative impact on the banks’ asset quality. However, it also prevents banks from taking early restructuring or recovery action on specific borrowers.

“This could lead to higher credit losses after the moratorium is lifted. We expect an increase in the banks’ impaired loans after the moratorium ends, especially if the coronavirus outbreak is prolonged and continues to disrupt domestic economic activity,” it said.

Moody’s also noted that before the automatic moratorium, banks were already offering debt moratoriums to borrowers on a case-by-case basis, and over 70 per cent of banking loans as of Dec 31, 2019 falls under the moratorium.

Among the banks it rated, Public Bank Bhd (A3 stable, a3) and Hong Leong Bank Bhd (A3 stable, a3) have the highest proportion of loans which qualifies for the moratorium because these banks focus on the retail and SME segments, it said.

“However, the total amount of deferred loans could change as cash-rich customers opt out and banks grant debt moratorium to corporate borrowers,” the research firm said.

Other regulations will increase risk for bank creditors

Moody’s said BNM is also encouraging banks to lend by temporarily lowering the regulatory requirements on liquidity and capital, in line with similar measures undertaken by the European Central Bank in March 2020.

It said that banks can now utilise the 2.5 per cent capital conservation buffer and regulatory reserve, and operate below the minimum 100 per cent liquidity coverage ratio until Dec 31, 2020.

“The minimum net stable funding ratio will also be lowered to 80 per cent from 100 per cent when it is implemented in July 2020,” it said.

However, these regulatory relaxations could also increase risks for bank creditors, said Moody’s.

“As for now, Malaysian banks have capitalisation that is well above the existing regulatory requirements and liquidity is also strong, with some buffers above the regulatory minimum.

“The liquidity pressure arising from the debt moratorium will likely be offset by weak loan demand and an increasing number of borrowers opting out of the automatic moratorium,” it added.

— BERNAMA