Monday, 12 September 2016

More provisions for R&R loans, may dampen bank earnings further

More banks are setting aside provisions to reschedule and restructure (R&R) loans and this may further dampen earnings and impact asset quality this year as the sector braces for a challenging year.

Banking sources told StarBiz that since the guidelines on restructured and rescheduled loans came into force in April last year, not many banks have proactively set provisions for R&R loans but now will do so amid the tough economic and investment climate.

R&R facility refers to a modification to the original repayment terms and conditions of the loan following an increase in the credit risk of a customer.

The move to provide for R&R loans was made to prevent future loan default and rising non-performing loans. Among the banks, the country’s largest lender Malayan Banking Bhd (Maybank) has been proactive in rescheduling and restructuring some of its business and corporate banking borrowers’ facilities.

Other banks have also stepped up efforts in providing for R&R loans.

For the first half year ended June 30, Maybank’s profit was impacted due to provisions for loan impairments as it undertook proactive restructuring and rescheduling of clients’ loans to better match their repayment abilities with projected cash flows. The bank’s net profit fell 21.3% to RM2.59bil due to higher provisions for loan and securities impairments amounting to RM2.06bil.

Loans that have been restructured and rescheduled will be classified as impaired, in accordance with the Classification and Impairment Provisions for Loans/Financing guideline by Bank Negara that took effect from April 1, 2015.

This means that although R&R loans may be “performing” in nature, these loans will need to be included in a bank’s “impaired” category. Maybank has been proactively managing its asset quality by restructuring and rescheduling loans this year, which has contributed to the increase in allowances of loan losses of RM1.85bil for the first half compared with RM548.9mil a year ago.

The guidelines on R&R loans requires banks to comply with two additional guidelines for the classification of impaired loans. First, the classification of R&R loans as impaired loans, and second, the reclassification of R&R loans from impaired to non-impaired only after a consistent repayment has been observed for at least six months.

Under the guidelines, new R&R loans effective April 1 of last year in the Central Credit Reference Information System (CCRIS) would be classified as impaired. Banks use CCRIS as part of their assessment of borrowers’ creditworthiness.

UOB Kay Hian banking analyst Keith Wee said only Maybank had been relatively proactive in initiating the R&R process on its oil and gas (O&G), real estate and other lumpy corporate loans under the bank’s watch list.

Other corporate-centric banks such as RHB Bank, AMMB, CIMB and Affin that have relatively sizeable O&G portfolios have not reported any significant spikes in O&G-related impairments, he added.

In a research note, Wee noted: “We believe that this could be due to the fact that these banks may not have pro-actively initiated R&R process on their O&G loans. Given the current environment, we believe that it is inevitable that they would have to start ramping up efforts to approach these customers for a potential R&R to prevent an outright loan default scenario in the second half of this year. This is where we could start to see a pick-up in lumpy impairments from these banks and consequently further increase in overall aggregate provisions.’’

Earnings for the banking industry in the second quarter registered a 10.1% year-on-year contraction as rising impairments was the key drag on earnings.

Meanwhile, Maybank IB Research said in a report that cumulative absolute gross impaired loans (GIL) rose 18% year-on-year (y-o-y) end-June. This was driven almost single-handedly by a 56% jump in Maybank’s GIL due to higher incidence of R&R loans emanating from O&G, shipping and steel related sectors.

CIMB’s GIL ticked up 2% y-o-y due mainly to a rise in in impaired loans at its Thai operations. RHB saw lumpy corporate GILs in the property development and steel related sectors, while Aliance Financial Group’s GIL rose 20% y-o-y due to impairment of several SME loans, it noted.

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