BANKS, expected to take a hit from not being able to impose additional charges for hire purchase (HP) instalments that are deferred over the six-month moratorium period, are in talks with Bank Negara Malaysia and the Ministry of Finance (MoF) on some options to help mitigate the impact, sources say.

The banks have proposed some ideas for the authorities’ consideration. These include being given grants or soft loans, as well as tax deductions, according to several industry sources. The proposals were made through the Association of Banks Malaysia and the Association of Islamic Banking and Financial Institutions Malaysia.

“We made representations through the associations. There are various options that we put on the table — the key ones being to obtain some kind of cheap funding and for tax deductions — but really, we don’t know what it is the government will agree, or have the capacity, to grant us,” a bank CEO, who declined to be named due to the sensitivity of the matter, tells The Edge.

“At the end of the day, we’re just seeking for some kind of concession to be given to us to partly mitigate the hit,” he says.

On May 6, at MoF’s urging, banks agreed  not to charge additional interest or profit on HP instalments that are deferred over the six-month moratorium period that started in April.

For borrowers, the move is positive as it gives them some breathing room without adding to their financial burden in these difficult times. Post-moratorium, their monthly repayments can continue to be the same — just that their loan tenure will be extended by six months.

But for banks, it comes at a cost. Due to MFRS 9, an accounting standard that kicked in from 2018, banks will be required to set aside a one-off provision in the second quarter — which is when the moratorium took effect — for a modification loss, or what is known as a Day 1 modification loss (ML). The ML is the difference between the present value of the cash flows under the original and modified terms of the loan.

“That banks not being able to collect additional interest on HP instalments over the six-month period will lead to a one-off Day 1 provision, for what is known as an ML under MFRS 9.

This loss relates to the opportunity cost over time from not having received the additional cash flow. By our estimates, the ML for the banking industry as a whole works out to about RM4.4 billion,” Maybank Investment Bank Research says in a May 7 report.

For perspective, this is about 2.7% of the industry’s total HP loans of RM165.6 billion as at end-2019. HP accounts for only about 9.3% of industry loans.

According to another bank CEO, the ML impact will differ from bank to bank, with some posting reduced profits and others potentially losses. “The impact is big, and this is even before addressing Islamic fixed rate financing, which will also incur substantial Day 1 ML,” he tells The Edge.

“That is why we are asking the authorities for assistance. We’re not arm-twisting them into anything. If they give us some [concession], well and good. If they don’t, then we just have to find our own ways to recover the ML through new business in the future… but it will take a long time to reduce the impact,” the CEO adds.

CGS-CIMB Research estimates that the ML for HP could reduce banks’ FY2020 net profits by 14.4%. The worst hit is likely to be Affin Bank Bhd, which has the highest proportion of HP loans to overall loans, at 23.2% as at end-2019. Nevertheless, in absolute terms, its HP portfolio is relatively small at RM10.6 billion.

Others expected to be hard hit are Malayan Banking Bhd (Maybank), which has a RM49.4 billion HP portfolio, Public Bank Bhd (RM49.1 billion), Hong Leong Bank Bhd (RM17.4 billion) and AMMB Holdings Bhd (RM13.6 billion). (see chart).

Maybank, which announced its 1Q results last Thursday, guided analysts that its Day 1 ML from the HP portfolio could be about RM1 billion. It said it would have a clearer picture only later as banks are still in discussion with the authorities.

“[During the six months], we will incur funding costs, but we’re not going to have income on the assets that we on-lend. So, one of the things we are asking Bank Negara or MoF to consider is giving some kind of cheap funding to the banks … it could be at 1%, or 0% ... basically, below the normal funding rate, but of course we also understand that the condition attached to it would be that this money, we need to disburse [as financing] to customers,” the earlier CEO says.

An earlier attempt to get the authorities to temporarily suspend some MFRS 9 requirements is not likely to be successful, bankers say.

Meanwhile, some bankers say they face difficulty getting customers to confirm if they want to opt in or out of the moratorium for HP and this could also have a negative impact on the banks.

“Under the HP Act, you must get the customer’s consent for you to vary the terms of the contract. And in this instance, the terms have been varied because of the extension of the tenure by six months. So, if you don’t get official consent for whatever reason, the documentation process is not complete and that means the customer will go into a technical default post-moratorium,” one explains.

Developments on the ML front come at a time when the industry is also dealing with the prospect of lower margins following sizeable cuts in the overnight policy rate (OPR) this year, and higher credit costs from worsening asset quality as a result of the impact of the Covid-19 pandemic.

Bank Negara has already cut the OPR by 100 basis points this year and some anticipate another cut in the second half. All these will have an impact on banks’ earnings.

“2020 will be exceptionally challenging and earnings will be under pressure for banks,” says Public Bank chairman emeritus, director and advisor Tan Sri Teh Hong Piow in a statement to announce the bank’s 1Q results last Friday.

All eyes will be on how the banks perform in the second quarter. Of the three big banks that reported first-quarter results last week, Maybank saw net profit grow 13.3% year on year to RM2.04 billion, but it warned of a margin squeeze and possible weakness in asset quality after the six-month moratorium.

Public Bank’s net profit fell 5.7% y-o-y to RM1.33 billion, while CIMB Group Holdings Bhd saw net profit decline 57.4% y-o-y to RM507.93 million.