Bank credit costs seen rising on SME strain

Malaysian Reserve

6 days ago

CREDIT costs in the Malaysian banking sector are expected to edge higher as economic growth slows and risks mount within the small and medium enterprise (SME) segment.
CIMB Securities Sdn Bhd, in its latest report on historical asset quality trends, is maintaining a 'Neutral' stance on the sector despite forecasting mild deterioration in credit metrics.
'We have reviewed our sector credit cost projections, taking into consideration the potential impact of slower growth on the SME segment and historical trends. Our assumptions indicate that sector credit costs may rise by 12 basis points (bps) on account of a possible change in probability of default assumption for the SME segment.
'However, as this is in line with our earlier assumed 15bps increase in credit costs, we are maintaining our forecasts and 'Neutral' rating,' it noted.
The research house said that the SME portfolio remains under scrutiny.
'The initial segment that may face some risk is likely to be the SME segment, which currently accounts for 16.5% of total loans on average for the banks under our coverage,' it stated.
'Assuming probability of default (PD) is raised to 6% from 4.5% for the SME segment, while loss given default is maintained at 50%, this implies that the estimated credit loss (ECL) may need to be raised by 75bps for the SME segment in a slowing growth cycle. On overall basis, this translates to a 12bps increase in sector credit costs,' it explained.
CIMB Securities noted that credit costs historically trend in tandem with macroeconomic cycles.
'During a normal economic cycle, credit costs usually range from 20bps to 30bps, while a good economic cycle typically leads to benign credit costs of 10bps-20bps. In a slower growth cycle, credit costs tend to climb higher than 30bps, towards the 40bps-50bps range.'
The 2020 pandemic-driven recession provides a stark example.
'The most recent recession during the 2020 Covid-19 pandemic caused a significant jump in credit costs to 79bps in 2020, coinciding with a 5.5% year-on-year (YoY) decline in GDP and an 8.6% YoY drop in exports. Prior to that, during the 2008 recession, credit costs peaked at 70bps as GDP declined by 1.5% YoY and exports contracted by 10.9% YoY.'
While direct trade-related loans remain low, secondary risks are a concern.
'Exports-related loans are insignificant, accounting for 1%-4.7% of total loans for banks under our coverage. We reiterate there will likely be a larger impact from secondary spillover effects on trade-related supply chain vendors and suppliers.'
CIMB Securities is leaving its forecasts unchanged for now.
'We are maintaining our forecasts for now, as our latest estimate is based on broad assumptions while each bank's portfolio will have a different risk profile.'
The firm retains its 'Buy' recommendations on Alliance Bank Malaysia Bhd, Public Bank Bhd and RHB Bank Bhd.
'We maintain our 'Neutral' sector rating, and retain our 'Buy' calls on Alliance Bank, Public Bank and RHB Bank, as dividend yields remain attractive at current levels,' it concluded. — TMR
This article first appeared in The Malaysian Reserve weekly print edition