Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on June 6, 2022 - June 12, 2022

ANALYSTS continue to expect bank provisions to come in lower this year despite fresh challenges arising from certain troubled oil and gas (O&G) firms such as Sapura Energy Bhd and Serba Dinamik Holdings Bhd, and the expected rising interest rate environment.

“Yes, there are problems with certain O&G accounts that have been highlighted in the press, but from what we understand, the banks with exposure to them have already done proactive provisioning, and this should cover the majority of their exposures already,” MIDF Research head Imran Yassin Md Yusoff tells The Edge.

Tushar Mohata, a banking analyst at Nomura Research, concurs. “Taking everything into consideration, our view on provisions has not changed — we expect it to be lower year on year. Banks were last year building up a lot of overlay provisions, and most of them have not used up a material chunk of the overlays. So, if anything, there are chances of writebacks happening in due course,” he tells The Edge.

He sees rising inflationary pressure as the potentially bigger threat to banks’ provisions.

“Inflation is a rising risk factor that all banks are watching closely. They will want to see how it affects the debt servicing capability of consumers and businesses because cost of living will be higher. So, it is possible that banks may decide to hold on to their overlays for a longer time and delay writebacks towards the end of this year or maybe even next year,” he adds.

Meanwhile, repayment assistance (RA) programmes offered by banks are progressively coming to an end. Banks have guided that the percentage of their exposure to loans under RA have come down significantly, with most borrowers resuming payments as normal.

“It used to be in the double-digits, and now it has come down to single-digit levels, so the overall trend is positive. However, some customers continue to need assistance for a more prolonged period — we are likely to see whether additional provisions were needed in the third- or fourth-quarter results, once the relief measures have ended. The overlay balance is significant for most of the banks, so it should not be a major problem,” Mohata says.

MIDF’s Imran expects the majority of future provisions to be centred on credit-related provisions for graduating RA loans, and less so for macroeconomic overlays and O&G sector exposure.

At AMMB Holdings Bhd’s full-year results briefing on May 31, its group chief financial officer Jamie Ling was asked by the media whether the mid-sized lender had made adequate provisions for its exposure to “two specific” O&G companies. Ling replied: “We have provided up to 83% of our total exposure for O&G — for the two specific [companies]. From that perspective, we have drawn the line around that episode. Eighty-three per cent is one of the highest cover levels for this, so we are confident that it is adequate.”

Impaired loans in the banking system rose 5% y-o-y in absolute terms in April and are up 11% year to date, Bank Negara Malaysia’s latest data shows. Impaired loans were higher YTD mainly for share financing (+5%), purchase of non-residential property (+2%), personal loans (+12%) and working capital loans (+25%).

As such, the industry’s gross impaired loans (GIL) ratio was higher at 1.57% in April compared with 1.44% in December 2021.

“The rise in impaired loans is not surprising, given that loans under moratorium, particularly under the Pemulih [government stimulus package], have started rolling off since February this year, and we continue to expect the GIL ratio to continue to rise in the coming months,” says Maybank Investment Bank Research in a June 1 report.

Recent O&G developments

On June 1, debt-laden Sapura Energy was classified as a Practice Note 17 listed issuer, given going concerns over its shareholders’ equity position of RM85 million as of Jan 31, which was less than 50% of its share capital of RM10.9 billion. The company is currently in negotiations with creditors for a proposed scheme of arrangement as part of its debt restructuring plan, after receiving winding-up petitions.

On the same day, Serba Dinamik said its unit, Serba Dinamik International Ltd, defaulted on a sukuk with an outstanding principal of US$222.22 million (RM975.65 million) that matured on May 9. The O&G services firm also defaulted on ringgit-denominated debt after missing payment on May 24, again citing the impact of Covid-19 on operating conditions.

It recently posted a net loss of RM434.19 million for the third quarter ended March 31, 2022 — its third consecutive quarter in the red and its largest net loss so far.

Nevertheless, theedgemarkets.com reported last Friday that six lenders were said to have arrived at a settlement with Serba Dinamik and four of its subsidiaries in regards to the scheme of arrangement and restraining order sought by the companies. It is understood that the parties have agreed that the lenders would hold their applications for a winding-up petition against the Serba Dinamik companies, provided that the companies do not default on the payment of debts as agreed in the proposed scheme of arrangement.

The parties are set to finalise the proposal on Tuesday (June 7).

The six syndicated and bilateral lenders that filed the winding-up petition were reported to be HSBC Amanah Malaysia Bhd, Ambank Islamic Bhd, Bank Islam Malaysia Bhd, MIDF Amanah Investment Bank Bhd, Standard Chartered Saadiq Bhd and United Overseas Bank (Malaysia) Bhd. This was after the Serba Dinamik companies failed to service their RM1.2 billion syndicated term financing.

MIDF’s Imran notes that, even with these new developments, banks would already have had early-warning triggers that would have required them to make proactive provisions earlier. The problems at distressed companies do not surface overnight, he points out, adding that the MFRS 9 accounting standard requires banks to make forward-looking provisions.

“So, even with all these new developments coming in, the way I understand it, if banks need to top up provisions, it would not be substantial. You wouldn’t get lumpy provisions,” he remarks. “Thus, we don’t see this as something that is going to be a stumbling block for the recovery of banking sector earnings this year. If you look at loan growth, it’s growing nicely [at 5% y-o-y in April], in tandem with the growing economy. The only potential drag on earnings is bank’s non-interest income, because of the volatility of the bond market and yields going up.”

MIDF expects Bank Negara to raise the overnight rate by 25 basis points in 2H2022, following a similar hike on May 11.

 

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