Job losses may pick up, thereby affecting loan repayment

IT is difficult to predict the level that the non-performing loans (NPLs) ratio can reach in the event of a protracted downturn.

Suffice to say that economists and banking analysts have expressed concern that as the business environment weakens, job losses may start escalating thereby affecting repayment capabilities.

“If this drags on, it can be quite dire,’’ said Ching Weng Jin, acting head of research at ECM Libra. Loans given out last year, he reckoned, would be at the greatest risk of going into default.

For 2008, industry loans growth was strong, at 12.8% or about RM82bil. Of that, close to RM30bil was for business-related loans and another RM30bi was for purchases of properties.

Together, these two segments make up about 75% of the current NPLs. “So these are the segments to keep an eye on,’’ said Ching.

To date, Ching observed, the rate of recovery (previous NPLs reclassified as performing and amounts recovered less sums written off) have been almost the same as that of the formation of new NPLs.

“Therefore, the net increase in NPLs as a percentage of total loans book may not rise significantly unless recoveries weaken,’’ Ching said.

(Net NPLs refer to the gross amount of NPLs less interest-in-suspense less specific provisions. Gross NPLs, on the other hand, are the bad loans over a three-month period as a percentage of total loans.)

A senior analyst who tracks banks said: “Basically, most banks are guiding for credit charge-off rates of 80–90 basis points (bps). For our forecasts, we have generally assumed charge-off rates of 100–120 bps.’’

(Credit charge-off rates refer to loan-loss provisions charged to profit and loss as a percentage of gross loans.)

“Taking the percentage of current NPLs in the business and mortgage sectors, and assuming that new NPLs rise at a slightly more pronounced rate than currently, then you could be seeing anything between RM4bil and RM5bil in new NPLs over the coming year,’’ Ching said.

For December, NPLs by sector indicate that business loans (for working capital and construction) comprised 41% of total loans which stood at RM34bil. Mortgage loans (residential and non-residential) made up 39%.