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Monday, July 11, 2022

Uptick in loan defaults likely

Average NIMs of some local banks are expected to broaden slightly this year from the 2.28% registered in 2021.

Higher loan defaults, among individual borrowers and corporates, are expected to emerge as interest rate hikes to reduce inflationary pressures grip the economy.

Although the higher rates are good news for banks in terms of profitability, they may also result in loan defaults in the near term.

UCSI University assistant professor in finance Liew Chee Yoong, who is also a fellow at the Centre for Market Education, said the gross impaired loans (GIL) ratio would be higher due to the latest interest rate hike.

UCSI University assistant professor in finance Liew Chee Yoong

“The rise in interest rates will raise the interest expense of loan borrowers and increase their financial risk.

“Therefore, I will not be surprised if more individual and corporate borrowers will be in financial distress due to higher interest servicing this year.

“More loans will be impaired due to the higher likelihood of credit default by borrowers,” he added. StarPicks Sunway TES ICAEW- The ideal pathway towards a global career for SPM leavers

The GIL ratio is defined as gross impaired loans as a percentage of gross loans, advances and financing.

Bank Negara has raised its overnight policy rate (OPR) by 25 basis points (bps) to 2.25% on July 6 amid positive economic growth prospects. It was the second consecutive increase after the 25 bps hike in May, which was also the first time the OPR was raised since the onset of the Covid-19 pandemic.

The OPR, which is a benchmark rate that allows banks to determine their lending and deposit rates, had been reduced by a cumulative 125 bps during the pandemic to a historic low of 1.75%.

RAM Rating Services Bhd co-head of financial institution ratings Wong Yin Ching said higher interest rates could impinge on some highly leveraged borrowers, although most borrowers would likely be able to absorb the slightly higher loan instalments.

RAM co-head of Financial Institution Ratings Wong Yin Ching, https://apicms.thestar.com.my/uploads/images/2022/07/11/1654838.jpg

“We may see the banking sector’s GIL ratio rise to 2.5% by end-2022, which is still deemed manageable in our view.

“Provisioning expenses, however, are not anticipated to increase in tandem with impaired loans as banks had judiciously built up provisioning reserves since the start of the pandemic.

“With most of the loan relief measures being progressively wound down in the first half of the year, defaults have begun to trend up,” she added.

The banking industry’s GIL ratio rose from 1.5% as of end-December 2021 to 1.64% as of end-May.

CGS-CIMB Securities analyst Winson Ng also expected higher GIL ratios this year.

“We expect the gross impaired loan ratio to increase 1.8% to 2% at end-December due to the credit risks from the Covid-19 and negative impact from higher inflation and interest-rate hikes.

“Headwinds, including higher inflation, could also be negative for asset quality and loan growth,” he said.

AmResearch banking analyst Kelvin Ong saw a gradual uptick in GIL ratio as the broad repayment assistance (including the Pemulih moratorium) had expired at end-June.

Asset quality ratio for the sector is expected to be higher at around 2% compared with 1.4% as of end December 2021, amid the transition towards targeted repayment assistance, according to him.

Commenting on the downside risk for the sector this year, Ong said: “Any prolonged or worsening supply chain disruptions will impact the pace of economic recovery and consequently affect our estimates for earnings growth of banks.

“Higher inflation pressures will impact consumer spending as well as profit margins of business loan borrowers which will lead to a potential deterioration in asset quality.”

Although most analysts expected the higher net interest margins (NIMs) to boost banks’ earnings from the latest OPR hike, UCSI’s Liew disagreed.

“I don’t think the higher OPR will improve the NIMs of banks. My prediction is that it will be reduced due to lowering demand for bank loans, which reduces the banks’ interest income and average earning asset value (that is, the amount of bank loans that are given out to borrowers).

“The increase in interest rates by the central bank will reduce the demand for bank loans from companies and individuals as the cost of financing becomes more expensive,” he said.

On the other hand, Liew said lenders would need to continue paying interest to risk-averse depositors who put their monies in banks during an economic uncertainty and this would reduce the NIMs.

According to RAM’s Wong, rising interest rates are a boon to NIMs as a majority of the domestic banking industry’s loans are floating-rate facilities, which would reprice faster than deposits.

That said, Wong added that the uplift in NIMs would be moderated by the increasingly deposit competition, as well as slower current and savings account expansion as some depositors go for term deposits.

Overall, Wong said the average NIMs of some local banks are expected to broaden slightly this year from the 2.28% registered in 2021.

NIM is a measure of the difference between the interest income generated by banks and the amount of interest paid out to deposits.

CGS-CIMB’s Ng, who forecast loan growth of 4% to 5% for this year, is projecting a 4% net profit growth, mainly driven by the OPR hike and lower loan loss provisioning.

Ong is maintaining a loan growth projection of 5% to 6% this year, premised on an expected gross domestic product expansion of 5.6% this year.

With the additional taxes due to Cukai Makmur or prosperity tax, the earnings growth for banks are expected to be flat at 1.5% this year, according to Ong.

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Financial literacy and bankruptcy

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Sunday, July 10, 2022

Latest Covid-19 Omicron BA.5 variant has landed Malaysia!

Five things we've learned about the BA.4 and BA.5 Omicron variants

Malaysia entering new Covid-19 wave as Omicron BA.5 variant hits

Malaysia is entering a new Covid-19 wave, with the Omicron BA.5 variant already present in the country.

Health Minister Khairy Jamaluddin said the ministry had already detected five BA.5 variants through genomic sequencing as of June 30.

"This means that BA.5 is already present in the country. These cases were found through genomic sequencing on positive cases between May and June.

"There is a big possibility that BA.5 has already spread widely in Malaysia," he told a press conference at Parliament today.

Meanwhile, Khairy said the country has seen a 31 per cent increase in Covid-19 cases from July 3 to 7.

He informed that hospitalisations had also increased by 13.7 per cent, from 835 patients last week to 968 patients this week.

"A majority of the cases are in categories one and two. This is something that we have expected," he said.

https://dai.ly/x8cbvyu

KUALA LUMPUR: Five cases of the fast-spreading Covid-19 Omicron BA.5 variant have been detected in the country, says Health Minister Khairy Jamaluddin.

He warned the public that the ministry expected the number of Covid-19 cases to rise in the next few weeks as the newer Omicron variants spread easily.

ALSO READ: KJ: We may issue compounds if cases spike

Apart from these five cases, other cases of Omicron sub-lineage variants that have been detected were six cases of BA.2.12.1 and two incidents of BA.5.2.

“All these cases were detected between May and June. However, there are no cases of sub-lineage Omicron BA.4 recorded so far.

ALSO READ: Bracing for another wave of Covid-19 infections

“We are expecting that new infections will increase due to Omicron BA.4 and BA.5, especially the BA.5. This is because Omicron BA.5 spreads easily compared with previous Omicron variants BA.1 and BA.2,” he told a press conference here yesterday.

Khairy said the new Covid-19 wave should not be taken lightly as 4,020 cases were reported just on July 7.

ALSO READ: Many having second thoughts on second booster

From July 3 to 7, the ministry had already recorded 14,967 cases, which is an increase of 31% compared with the previous week’s 11,394 cases, he added.

There was also a 13.7% increase in hospital admissions to 968 patients during this period from the 835 patients in the previous week. Ten deaths were recorded.

He added that those who have completed their Covid-19 vaccination or had been infected previously could also be infected with this variant.

“Those who have not taken their booster, especially senior citizens and people who have comorbidities, should get their booster shot, as it is vital against the new wave of Omicron BA.5.

“A total of 7,393,199 (31.40%) people have not taken their first booster shot while 151,018 (6.06%) individuals have received their second booster shot as at July 7,” he said.

Khairy also said that the ministry’s technical committee was still looking into the need for a second booster shot among those aged 60 and below without any illnesses, while vaccination for those aged five years and below was still not recommended.

However, he said there were some people who used a loophole with the excuse of travelling to get a second booster shot.

The second booster is available free of charge at registered private vaccination centres listed at https://vaksincovid.protecthealth.com.my/find.

For those aged 18 to 59 in the immunocompromised category, Khairy advised they undergo an evaluation first before getting the second booster shot.

He also said that as at July 3, 4,001 patients who have taken the Paxlovid antiviral medicine showed no serious side effects.

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Financial literacy and bankruptcy

Stretching your ringgit: The importance of knowledge in this space cannot be more timely, especially when Malaysians are doing their level best to stretch their ringgit in order to cope with the increasing cost of living from inflationary pressures, which are spiralling out of control.

It is not enough to be good at your job. Managing your money well is as important as having good hygiene.

Lack of financial discipline reasons for bankruptcy

Using a credit card or apps wisely to accumulate points for future spending, waiting for bargains such as free shipping options or vouchers on ecommerce platforms on special days of the months to purchase necessities are just a few examples of being financially aware.

FINANCIAL literacy is an important agenda for a country’s economic well-being.

Most governments around the world would like for their citizens to be financially literate, be it entrepreneurs, working professionals, white collar or blue collar workers.

It is not enough to be good at your job. Managing your money well is as important as having good hygiene.

Recently, the Malaysia Department of Insolvency (MDI) reported that 287,411 people in the country have been declared bankrupt as of March 2022.

Between 2018 and May 2022, there was an increase of 46,132 new bankruptcy cases.

Of this number, 59% (amounting to 27,365) of the bankrupt were aged below 44.

This led to the Prime Minister highlighting his concern on youth bankruptcy and requesting for the relevant authorities to look into this matter including potentially revamping the laws on insolvency.

It is important to note that due to the pandemic, our government has in fact raised the threshold of bankruptcy from RM50,000 to RM100,000 in 2020.

Many legal actions against defaulters of loans were also postponed due to the effects of the pandemic.

Personal loan main reason for default

Diving into the MDI’S statistics, I realised that the main reason for bankruptcy was due to default of personal loans with an overwhelming percentage at 42%, followed by hire-purchase loans (15%) and business loans (13.5%).

Personal loans have often been touted to charge exorbitant interest rates, especially credit card schemes.

A simple illustration: when month end comes, there are often three options to settle your credit card bill, namely statement balance, outstanding sum or minimum sum.

The right thing to do would be to settle the statement balance. Settling the outstanding sum in full means that the credit card user is paying down the credit card debts which isn’t yet due, which defy the purpose of utilising credit card in the first place.

Paying only the minimum sum, which many people often do, would lead to one incurring high interest on the outstanding credit card debt.

This would snowball to levels which are highly exorbitant.

The statistics above is telling because it shows that excess consumption pattern is a key reason for bankruptcy.

In terms of youth bankruptcy, it makes sense especially with social media propagating binge spending, splurging on luxury goods and the shallow mindset of keeping up with the Joneses.

Living beyond one’s means owing to social pressure simply isn’t going to go out of fashion, more so in today’s digital age.

Proliferation of get-rich-quick schemes and scams

There is no doubt the lack of financial discipline and bad spending habits are reasons which contribute to this social issue.

However, I believe another major contributing factor is the increasing number of scams and get-rich-quick schemes. These schemes often tap on the most vulnerable segment of the society, namely those who are greedy, desperate or naive.

Greed is one of human nature’s biggest weaknesses. Despite the evolution of mankind, this primal instinct has continued to flow through the DNA of mankind. I do not doubt the importance of greed as a driver for progress, but too much and it becomes fatal.

Desperation, especially in the case of hardcore poverty or extreme emergency without anyone to rely on, there is hardly any choice to seek help.

We have seen this episode played out, especially in the times of economic recession, high unemployment not unlike the period of pandemic we have all been through recently.

Of the three, the most addressable would be the one who is naive, in short, one who lacks the necessary knowledge.
Stretching your ringgit

The importance of knowledge in this space cannot be more timely, especially when Malaysians are doing their level best to stretch their ringgit in order to cope with the increasing cost of living from inflationary pressures, which are spiralling out of control.

I would like to put it on record: Accumulating financial knowledge does not mean becoming an investment prodigy. It can be as simple as understanding the various options for people to stretch their money.

One of the most common savings hacks would be to channel your monthly salary to a “flexi” or “semi-flexi” home loan account. This simple gesture every month automatically lowers the interest on the loan to be incurred.

Your unused funds will be utilised to further reduce the principal and interest while you have the option to withdraw the excess amount if you require to use the funds.

Of course, the best thing to do is to be prudent in spending, in essence practicing delayed gratification at all times.

The best investment is knowledge

It is a good sign that there is an increasing number of licensed financial professionals such as Chartered Financial Analysts and Certified Financial Planners out there today.

We also do see many more collaborative efforts between industry professionals working hand in hand with regulators in adopting social media to reach out to the masses.

With the advent of social media, it is also crucial to sift out genuine financial literacy advocates. After all, there are many free resources online today.

It is not to say the smartest people from the top of their professions cannot be hoodwinked. We have seen how 34-year-old Ng Yu Zhi of Envy Asset Management and Envy Global Trading swindled prominent people like the general counsel for Temasek Holdings Pek Siok Lan, criminal lawyer Sunil Sudheesan, ex-president of the Law Society Thio Shen Yi, chairman of Vickers Capital Group Finian Tan and CEO of Chuan Hup Holdings Terence Peh, among others.

This purported nickel trading scheme amounting to S$1bil (Rm3.2bil) was the largest fraud or Ponzi scheme in Singapore’s history. The best part, red flags were obvious where both of the perpetrator’s entities above were not licensed by Monetary Authority Singapore and he was promising 15% returns in three months to his clients.

Ultimately, it comes down to the individual and a good sense of financial awareness when managing one’s own hard-earned money.

The best investment is in yourself. Whether it is learning a new skill or advancing your education, self enrichment gives the best return on investment.

As Benjamin Franklin once said, “An investment in knowledge pays the best interest”. He can’t be wrong considering his face is literally on the US dollar bill even till today. - StarBiz,

Ng Zhu Hann, the CEO of Tradeview Capital. He is also a lawyer and the author of “Once Upon A Time In Bursa”. The views expressed here are the writer’s own.