Why are loan impairment charges expected to remain high for Malaysian banks?

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Loan Impairment Charges Expected to Remain High for Malaysian Banks Due to Continued Debt Relief Withdrawal and Economic Uncertainty

Malaysian banks are anticipated to experience elevated loan impairment charges throughout 2021. This projection is primarily driven by the ongoing cessation of debt relief measures, which is expected to push non-performing loan (NPL) levels to an estimated 2.6 per cent by year-end. Despite a general economic recovery, improvements in bank profitability are likely to be constrained as these substantial impairment charges persist.
Withdrawal of Debt Relief Measures Fuels NPL Increase

The gradual discontinuation of various debt relief and repayment assistance programmes is a significant factor contributing to the expected rise in NPLs. As of February 2021, an estimated 11 per cent of the loan portfolios of the six major Malaysian banks were still under some form of repayment deferral. The conclusion of these programmes is anticipated to lead to a further increase in the system's NPL ratio in the coming months, particularly following the varying levels of lockdown implemented in the first quarter of 2021.
Economic Uncertainty Clouds Asset Quality Visibility

Heightened economic uncertainty, stemming from an increased unemployment rate and a rise in Covid-19 cases since September 2020, continues to obscure the true visibility into banks' asset quality. This uncertainty prompted most of the major banks to increase their credit provisions in the latter half of 2020. While loan-loss coverage ratios improved to 105 per cent of NPLs by the end of 2020, largely through general provisions, the underlying economic conditions remain a concern.
Credit Costs to Approach 2020 Levels Amidst Low Coverage Ratios

Banks' credit costs in 2021 are expected to be comparable to the levels seen in 2020. This is partly because loan-loss coverage ratios remain relatively low when compared to projected NPL ratios, even with the general provisions set aside in 2020. The system's NPL ratio was suppressed during the automatic loan moratorium period, but its projected rise to 2.6 per cent by the end of 2021 necessitates sustained high credit provisions for major banks.
Profitability Constrained by Impairment Charges and Slow Loan Growth

The anticipated increase in NPLs following the expiry of relief programmes will likely elevate credit impairment charges above their pre-pandemic averages. This surge in charges is expected to impede significant improvements in bank profitability in 2021. Furthermore, revenue growth is projected to be tempered by anaemic loan growth and only a marginal increase in lending margins, further limiting the potential for substantial profit recovery.

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Why are loan impairment charges expected to remain high for Malaysian banks?

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