KUALA LUMPUR (February 23): Higher provisioning is expected to have a weakening effect on Malaysian bank profitability in Q4 2020 (4Q20), which is expected to be released this week, given the need to cushion economic shocks and financial due to the covid pandemic19.
Official data from Bank Negara Malaysia (BNM) in its latest quarterly bulletin for 4Q20 showed that the banking system’s pre-tax profit declined during the year, from RM8.55 billion in 1Q20, to 8 .05 billion RM in 2Q20, then to 8.2 RM. billion in 3Q20.
BNM expects banks’ pre-tax profit to rise to RM 6.35 billion in 4Q20. These figures were calculated after deduction of “depreciations and other provisions” and addition of “other income”.
This despite the improvement in net interest income (NII) over the quarters, with the NII for 4Q20 expected to reach RM13.9 billion compared to RM13.52 billion in 3Q20.
Malaysian banks are expected to release their fourth quarterly financial results this week.
A closer look shows that the “depreciation and other provisions” component increases over the quarters, which can be explained with the end of the global moratorium on government loans on September 30, 2020.
For 4Q20, BNM expects “depreciations and other provisions” to amount to RM 5.88 billion, compared to RM 3.31 billion in 3Q20, RM 2.37 billion in 2Q20 and 2 , 77 billion RM in 1Q20.
This indicates a correlation between bank profits and their provisions, said banking analysts and economists contacted by The Edge.
Indeed, higher bad loans would mean higher provisions and therefore lower income, explained MIDF Research director of research Imran Yusof.
Non-performing loans hit a nine-year high of RM28.7 billion at the end of 2020, according to central bank data.
From 24.9 billion ringgit in September, total impaired loans rose to 25.7 billion ringgit in October, then to 27.8 billion ringgit and 28.7 billion ringgit in November and December respectively.
Banks could also take additional steps to reflect the current economic climate, to be cautious, Imran said.
Bank Islam chief economist Dr Afzanizam Abdul Rashid believes pre-tax profit is falling because the allowance for depreciation has increased.
“This was reflected in the gross depreciation ratio which rose to 1.57% in 4Q20, against 1.37% in 3Q20, 1.44% in 2Q20 and 1.57% in 1Q20,” he said. he said, citing BNM data released last month.
However, he added that the buffer on bank profitability could come in the form of commission-based income and also government sales profits when yields were low.
Banks typically fund on an initial load basis based on their expectations and macroeconomic variables, said one analyst who declined to be named.
Therefore, the upcoming 4Q20 results are unlikely to see banks providing stellar sets of results based on the BNM estimates.
However, this is not surprising as banks have already moved towards higher provisioning, the analyst commented.
For 2021, the absence of change losses will help improve banks’ performance, while provisions are also expected to be much smaller as the economy recovers, the analyst explained.
Imran said the MIDF expects bank profits in 4Q20 to decline year over year. “This is due to the fact that we expect provisions to remain high due to the Covid-19 pandemic. However, net interest income is expected to start to recover despite the multitude of overnight policy rate cuts, as the effect of those drops should normalize by then, “he said.