Manageable Impact From Interest Waiver For Lower-income Borrowers
The MOF has instructed banks to waive interest payments for retail borrowers within the lower-income group for three month. Although this may come as a slight suprise, impact to 2021 sector earnings is still a manageable 8.6% inclusive of modification losses. Sector earnings growth will remain robust in 2021 and we see any weakness in share prices as an opportunity to accumulate. Maintain OVERWEIGHT. CIMB is our top sector pick, followed by RHB.
Three-month interest waiver for lower-income borrowers. The Ministry of Finance (MOF) has instructed banks to work on the exemption of interest payments for recipients of the bank loan moratorium. This will involve borrowers within the B50 income group for a three-month period beginning Oct 21 (4Q21). Recall that in the past, banks were allowed to accrue simple interest but could not charge compound interest, which led to modification losses. However, this latest announcement by the MOF means that banks will now have to forge three months of simple interest on all retail loans for lower-income borrowers that have opted in for the loans moratorium. This will impact banks’ 4Q21 interest income trends.
B40 represents only 10% of total loans base. B40 retail loans make up roughly 10% of the total commercial banking system loans base, of which only 30% have opted in for the existing loans moratorium. As such, assuming that there is no further increase in B40 loans moratorium, only 3% of total commercial banking system loans will be impacted by this interest waiver over a three-month period (4Q21). Nonetheless for our sensitivity impact calculation purposes, we have raised the total pool of domestic banking sector loans that could be entitled to this interest waiver from 10% to 12% to capture a wider income group (ie: B50), as banks do not disclose loans composition by B50 income group. In our estimates, we have also applied an industry average moratorium take-up rate for this lower income group of 30% across all the banks.
Impact to earnings manageable. Given the relatively low composition of lower-income loans customers in the commercial banks coupled with a 30% moratorium take-up rate and only a short three-month period, it is not surprising that the overall impact from this interest waiver is deemed to be relatively manageable for the banks. We estimate potential 2021 sector earnings impact of only 2.2% from a three-month interest waiver on all B50 loans
under moratorium currently. Combined with the expected modification loss (1-1.5% of 2021 earnings), our 2021 sector earnings are only expected to be impacted by 3.7%.
Worst-case scenario earnings impact of 8.6%. Even in the worst-case scenario whereby all the B50 were to opt in for the moratorium to enjoy this three-month interest waiver, we estimate a 7.1% impact on 2021 sector earnings. combined with the modification loss, total impact is still a manageable 8.6%.