What is Non-Performing Loan? (NPL) These are the loans which the borrowers have not been paying for 6 months or more. BNM’s link here for reference. For example, our mortgage is due but we do not have the money to pay for it. We could choose not to, the banks will send a reminder and then another reminder and perhaps they may send us a notice that they will auction our house many months down the road. They may then engage licensed auctioneers to conduct the public auction so that the property gets the highest possible price. The borrower will still get the surplus amount if any yeah.
What happens if the borrower has just failed to pay for the first few months and they have not yet reached the 6-month period? Well, these are known as gross impaired loans (GIL). While not all GIL will eventually turn into NPL but it is already a good indication of what may happen when the period for NPL classification arrives. Briefly, NPL ratio in Malaysia has remained low even by world standard but if GIL keeps increasing….
Article in themalaysianreserve.com Affin Hwang Investment Bank Bhd (Affin Hwang Capital) said based on a YoY basis, the outstanding gross impaired loans rose 6.5%. Based on a year-to-date, the number is up by 4%. With this, the banking system’s bad loan ratio also icnreased by 1.57% in February compared to 1.5% in December 2019. It said, “Notably, the working capital, residential property, construction and commercial property segments make up the bulk of impaired loans by ‘loan purpose’.”
The research house also said the system’s liquidity coverage ratio is at a comfortable level of 148% while the loan to fund ratio was unchanged at 83.3% in February. As for the core earnings per share growth, there will be a contraction of 20% fYoY in 2020E. RAM Rating Services Bhd’s (RAM Ratings) said, “The common equity Tier 1 (CET-1) ratios of the banks in our sample were above 12% as at end-September 2019. This is significantly higher than the minimum regulatory requirement of 7%.” It’s a comprehensive article. Please do read: Article in themalaysianreserve.com
Super briefly, what the above is telling us is that the financial situation for many borrowers may just get worse first before it could get better. It tells us also that our banks are now facing this situation from a position of strength which gives us some assurance that it is still under control. It tells us also that the share prices of some of these major Malaysian banks are really attractive now based on their potential results for 2020, as long as what is being analysed by the analysts do not become much worse.
Let’s google for some reference. Think of a bank you love. Say Maybank? Type in “Maybank share price.” The numbers will give us a guide of their share price versus the dividend yield for example. That number; dividend yield may just be much higher than Fixed Deposit rates today. Buying some undervalued shares with extra money may be a good decision when sentiment turns positive. Example?
If you buy a 1,000 units of a RM10 bank stock. That’s RM10,000 in price paid. It’s dividend yield is 8% which means we will get RM800 at the end of their financial year which is great because RM800 is still more than double the FD rate. However, if the stock price rises by just RM2 because the sentiment turned, if you were to sell the 1,000 units of shares, it will give you RM2,000 profits. Of course you should sell versus waiting for the dividends… right? 😛 Happy following.
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