KUALA LUMPUR (March 25): Bank Negara Malaysia (BNM) is likely to introduce additional relief measures to ease borrowers affected by by the COVID-19 outbreak.

In a document sighted by The Edge yesterday, BNM said banking institutions will grant an automatic moratorium on all loans/financing repayments/payments, principal and interest (except for credit card balances) to individuals and SME borrowers/customers for a period of six months from April 1, 2020.

It added that the automatic moratorium is applicable to the loans/financing that are not in arrears exceeding 90 days as at April 1, 2020 and denominated in ringgit.

“If turns out to be true, the impact will be negative on banks for this ‘6-month period’ as it will put a strain on [their] liquidity and working capital, which [are] also needed to cover interest expense, overheads and for lending activities,” Affin Hwang Capital research analyst Tan Ei Leen said in a note today.

Nonetheless, as a relief for banks, Tan noted the Net Stable Funding Requirement (lowered to 80%) and the Liquidity Coverage Ratio (LCR, below 100%) for banks could be relaxed.

On the other hand, AllianceDBS Research analyst Chin Jin Han opined the news to be positive for banks, stating that measures shed more light on BNM’s decision to reduce the statutory reserve requirement (SRR) by 1 percentage point last week.

“Overall, this helps address the uncertainty associated with earnings and asset quality arising from the COVID-19 (and movement restriction order) fallout. Like the previously approved COVID-19-related moratoriums, these loans are unlikely to be classified as impaired and translate to higher provisions (unless demonstrably compromised).

“Earnings should not be significantly impacted as interest income still accrues with little requirement for higher provisions. However, we do not discount the possibility of further policy rate action to support the economy, which would be detrimental to banks’ margins given flagging credit demand,” Chin said in a note today.

Affin Hwang’s Tan also noted that that investor sentiment is expected to be impacted and therefore negative on banks, which could result in another round of selldown.

“We will not be surprised that during this period, banks’ LCR will decline more significantly as banks would still require working capital to continue paying for interest expense, meet deposit withdrawals, meet debt repayments and sustain its overheads (this is despite interest income being recognized on the income statement).

"Nonetheless, if borrowers continue to face repayment/payment constraints after the 6-month moratorium is uplifted, higher default rates will start to show up on bank’s balance sheets and will be reflected as higher impaired loan provisions (or credit cost),” Tan said.

ELK-Desa Resources Bhd, with a “buy” rating and target price (TP) of RM1.14, is a preferred pick for Affin Hwang due to its attractive yield and resilient business in the auto-financing of mass-market used-cars.

For AllianceDBS, it prefers Hong Leong Bank Bhd (“buy”, TP: RM19.20) and Public Bank Bhd (“buy”, TP: RM19.70) for their conservative risk appetite, robust asset quality and limited exposure to the oil and gas sector.

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