Can banks sustain another blanket moratorium?

Questions remain about the financial health of banks, which have been thrust into a debate on suspending the collection of billions of ringgit worth of loans during the Covid-19 crisis.

This comes on the back of calls for a blanket extension to the loan moratorium as the pandemic continues to batter the economy.

One narrative is that banks should give back to the nation after raking in profits over the last few decades.

Proponents of this view also point out that the six-month suspension which ended in October this year has not affected banks, citing reports of pre-tax profits posted by several major banks.

But reports from analysts and research firms suggest that loan moratoriums and related losses have challenged the profitability of banks.

This, coupled with interest rate cuts and weaker loan growth in the present challenging business environment has limited their earnings.

Bank Negara governor Nor Shamsiah Yunus said reimposing a blanket moratorium “would not be a proportionate or responsible response” to the economic situation, while Finance Minister Tengku Zafrul Aziz said banks risked an estimated loss of RM79 billion over the six-month moratorium period.

Reports from analysts and research firms suggest that loan moratoriums and related losses have challenged the profitability of banks.

Maybank, the nation’s largest commercial bank, estimated that it had incurred approximately RM1 billion worth of one-day modification losses during this period.

A one-day modification loss is a one-off cost incurred when a bank opts for a particular method compared to what it could have earned by choosing an alternative.

Public Bank, meanwhile, for the first time declared no interim dividend for the second quarter ending June 30 as opposed to 33 sen per share in the same period last year.

Profitability is fundamental to ensuring that the financial system remains resilient and can support effective credit intermediation in the economy.

Stable profits support the accumulation of capital buffers, which enable banks to continue providing financial services even during periods of stress, thus acting to dampen the impact of adverse developments in the real economy.

Low profitability meanwhile could affect a bank’s willingness and capacity to lend, which would constrain the availability of financing to the economy.

How banks make money

There are three main ways in which banks make money.

1. Net interest margin

Banks typically use deposits to provide loans for customers. These loans come with interest rates which depositors have to pay. The difference, known as the margin, is kept by the bank.

For example, if a bank pays 1% interest on deposits, it may charge 4% interest on loans.

Banks also lend to each other on a huge scale, mostly on a short-term basis of no longer than three months or even just overnight.

The money earned on these loans is revenue for the bank. Some of it is given back to customers in the form of interest in checking and savings accounts. The money that the bank keeps is the net interest margin.

2. Interchange

Whenever you use a credit or debit card to buy something, whether in a physical store or online, the business in question has to pay what’s called an interchange fee.

This covers the cost of handling credit and debit transactions.

3. Fees

Banks charge customers all manner of fees – and penalties – such as monthly service fees, minimum deposit limits, ATM fees, overdraft fees, and foreign transaction fees.

Investment banks earn huge fees for advising companies and public institutions on issuing bonds and shares (securities), and from underwriting these issues.

Banks also make money by trading securities in equities markets. Their aim is to sell these securities at a profit or purchase them for less than they sold them for.

Banks also buy and sell international currencies, taking advantage of the different prices involved.

Banks and the digital boom

Perhaps the only winner at this time of pandemic economics has been digitalisation – a strategy that has kept businesses and even societies afloat.

The latest global survey by Standard Chartered shows the emergence of cashless and more conscientious consumers due to Covid-19.

Prior to the pandemic, only 30% of Malaysians said they preferred shopping online compared to 70% who preferred shopping in-person. This has shifted significantly with over 51% stating that they prefer online payments to in-person payments.

Banks reaped the benefits of digitalisation as the increase in preference for online payments holds true across a range of purchases, from groceries and travel to digital devices.

According to the survey, 79% of Malaysians now expect the country to go fully cashless, with a majority expecting this to happen by 2030.

In many ways, Covid-19 became a catalyst for change for financial institutions, presenting banks with an opportunity to make bold changes at a dramatic pace and further proving the resilience and robustness of this sector.