Question: Read the articles below and discuss the challenges that the local banks face. (Kindly please take your time to answer & highlights which part is important that I should include for challenges part thank you so much)

Article 1

Malaysian banks continued to display resilience in 2021 and performed better than in the previous year despite persistent economic headwinds with prolonged movement restrictions, moratoriums and repayment assistance, thanks to the buffers and structural strength built over the years. The year obviously kicked off on a high note with Bank Negara Malaysias (BNM) growth target set at 6-7.5 per cent, but it was later revised down to 3-4% amid the re-imposition of COVID-19 containment measures.

"Although the banks would be impacted due to the extended repayment assistance that would affect credit costs and also in terms of profit margins due to a modification cost, structurally the Malaysian banking system has remained strong enough to withstand distress, said Moodys Investors Service. "They are well capitalised and liquid enough to withstand unexpected losses that could materialise, it said, adding that Malaysian banks had remained profitable this year with some having performed better compared to 2020.

Kenanga Research senior equity analyst Clement Chua Min Tze said banks managed to report stronger income from more optimised cost of funds (CoF) arising from BNMs notion to keep record low Overnight Policy Rate (OPR) of 1.75% consistent during this period.

Article 2

Malaysia's banking sector is set to rebound firmly with estimated net profit growth of about 20 per cent in 2021, according to analysts. They said the sector would be a direct beneficiary of the country's expected solid economic recovery next year backed by the potential availability of the Covid-19 vaccines by September 2021. OANDA senior market analyst for Asia Pacific Jeffrey Halley said the banking sector should outperform in 2021 if the economy recovers as expected as the world moves past Covid-19.

"Unloved cyclical sectors are likely to outperform, of which banking is one. A recovery in Malaysia's cyclical sectors also reduces the likelihood of a sharp increase in bad loan provisioning, which will be another positive for the sector," he told the New Straits Times. Halley said there was no evidence yet that Malaysia's banking system was under stress from a huge increase in bad loan provisioning. "Those fears will ease further in 2021. As far as interest margin compression goes, the simple way it is addressed is by lowering the deposit rates on savings. Interest rates are already very low in Malaysia, so the worst of any interest margin compression is already behind the sector," he added.

Halley said Bank Negara Malaysia would have scope to lower rates further than 1.75 per cent in 2021 if needed."The major factors that may prompt it to do if the ringgit appreciation we are likely to see next year occurs at a level faster than the central bank desires."Secondly, the expected slower progressing economic recovery would likely prompt Bank Negara to cut rates more aggressively, he added.

CGS-CIMB analyst Winson Ng said the banks' recovery would be underpinned by a projected 30.2 per cent drop in loan loss provisioning (LLP) and a turnaround in net interest income (NII) growth from a decline of 5.4 per cent in 2020 to an increase of 4.7 per cent in 2021. "We remain overweight on banks, predicated on the potential re-rating catalyst from a recovery in banks' net profit growth given the better outlook for net interest margins (NIMs) and LLP.

"We also expect the sectors' dividend yield to improve from 2.5% in 2020 to 3.9% in 2021," he said in a report. Ng said banks' NIMs would likely recover on the back of the expectation of a stable Overnight Policy Rate (OPR) and the non-recurrence of the modification loss. Banks' non-NII growth has begun to pick up with a 9.6 per cent growth year-on-year (YoY) in the third quarter (Q3) of 2020, mainly driven by investment and brokerage income lifted by a surge in the trading value in the equity market. Ng said the end of the blanket loan moratorium on September 30 this year had affected banks' asset quality. Hence, there could be slippage in banks' asset qualities in Q4 of 2020.

The industry's gross impaired loan (GIL) ratio rose from an all-time low of 1.38% in end-September 2020 to 1.4% in end-October of 2020.

"We expect the uptrend in the industry's GIL ratio to continue, with a projected GIL ratio of 1.7% at end-December of 2020 and 2.0% at end-December 2021."However, we do not anticipate a spike in banks' GIL ratio due to the targeted repayment assistance to borrowers with the expectation of an economic recovery with gross domestic product (GDP) growth of 7.5% in 2021."

Ng added that a better economic climate in 2021 would lead to the creation of jobs and improvement in income for individuals and businesses. Hence this would help to alleviate the risks of a spike in the industry's GIL ratio. CGS-CIMB forecasts a slowdown in banks' loan growth from 4.4% by end-September 20 to about 4.0% by end-December 2020. "However, we project stronger loan growth of 4.0% to 5.0% for banks in 2021, premised on the expected economic recovery, with GDP growth of 7.5%.

Ng said the key development affecting banks was the end of the blanket loan moratorium as it had shielded banks' loan growth and asset quality in Q2 and Q3 from the negative impact of the Covid-19 pandemic as more than 50% (estimate) of the borrowers did not have to repay their loans during the period.

Potential downside risks for local banks include additional OPR cuts in 2021 and a protracted economic downturn extending into next year as banks might have to grapple with a potential slowdown in loan growth and a further increase in LLP.

MIDF Research head of research Imran Yusof said GIL was likely to increase in the coming month into Q1 of 2021 as the short-term negative impact from the Conditional Movement Control Order might come to the fore.

"We do not expect the GIL ratio to breach the 1.7% level given the targeted loan moratorium and repayment assistance program. We believe banks will have sufficient coverage due to the build-up of coverage for loan losses," he said.

The MIDF Research economics team has projected Malaysia's GDP to rebound to 7.0 per cent next year backed by the potential availability of the Covid-19 vaccine by Q3 of 2021.

"We expect the banking sector to be a direct beneficiary of this rebound. Hence, we foresee that provisions and loan impairments will start to taper by Q3 of 2021, better growth from NII coming from robust loans growth and low cost of funds, and operational expenditure continues to be well contained."

The firm expects banks' earnings under its coverage to expand 18.7 per cent in 2021 from the expected 24.4% contraction in 2020. "We expect loan demand to accelerate, leading to higher loan growth, especially in the second half (2H) of 2021. Besides consumer loans, we expect businesses will also drive loan growth in 2021, to fund for the expected increase in business activities."

Hence, MIDF Research forecasts a 5.0% YoY loans growth for 2021."Our optimism is premised on the recovery of the economy, made more certain with the availability of the vaccine in 2H of 2021.

"We expect credit cost to start normalising while income will stage a rebound. We maintain a positive recommendation for the banking sector. We recognise that there is short-term pressure that banks will have overcome," Imran said.

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Malaysian banks could see their non-performing loans (NPLs) increase up to 4% of total loans in the near term, S&P Global Ratings said, as provisions for potential credit losses are likely to be pressured over the next one to two years when the loan-repayment moratorium expires by the end of 2021.

Its associate director (financial institutions ratings) for South and Southeast Asia Nancy Duan said Malaysian banks credit costs are likely to stay elevated as the extensive moratorium continues, while credit cost normalisation is not expected to occur until 2023.

We are seeing the [gross] loan growth will grow at 4% [this year], but this is subject to increasing downside risks, and the gross NPL ratio will most likely only stay below 2% given the continuous distortion impact from the second blanket moratorium.

Eventually, we believe the gross NPL ratio could grow to a range of 3% to 4% by end-2022 once the current moratorium expires. We will see more crystallised asset-quality trends of Malaysian banks only next year, she said at the rating agencys webinar titled Rising Downside Risks for Malaysian Banks on Wednesday.

In its Financial Stability Review for the first half of 2020, Bank Negara Malaysia said overall impairments are projected to rise above 4% of loans by end-2021, mainly driven by higher business impairments. NPLs in the banking system reached a nine-year high of RM28.7 billion at end-2020, according to BNM data.

Duan said Malaysian banks credit costs are likely to increase to above 50 basis points (bps) to 60bps for this year and are likely to maintain at this level in 2022 as well, while noting further that Covid-19s credit stress for banks in Malaysia is expected to last longer alongside its peers such as Thailand and Indonesia.

[Notwithstanding that], Malaysian banks actually still have quite a good buffer compared to its peers like in the Philippines and Indonesia. Before the pandemic, Malaysia actually was placed in a place almost similar to Australia and New Zealand. You could actually see the clear weakening of Malaysia banking sectors strengths during the pandemic.

So now the question is whether the Malaysian banking sector has already hit a bottom in the current credit circle or is likely to give way further, she said. Duan pointed out that a delayed economic recovery, repeated moratorium distortion and negative government intervention in earnings/operation could threaten to materially erode the buffers Malaysian banks had before the pandemic.

Macro trends such as household deleveraging, an orderly rebalancing of property market and rebuilding of corporate financial buffer and earnings capability affect medium-term asset quality trend, she added. Going forward, Duan believes the strength of Malaysia's banking sector in terms of capitalisation and funding support creditworthiness is still quite strong.

Strong capital position and funding/liquidity conditions are critical buffers to the downside. We expect loan growth to slightly outperform deposit growth over the next two years, she added.

Duan also said high household indebtedness and property market overhang remain long-term challenges that need to be on the lookout for beyond the pandemic. We have seen some consistent improvement in the household deleveraging trend prior to the pandemic, but unfortunately the impact from Covid-19 [on] gross domestic product (GDP) growth has kind of disrupted this.

Having said that, we continue to believe the household deleveraging trend will continue in the few years and gradually normalise to the pre-pandemic levels, she said.

Another concern Duan pointed out is that the property market has been in an overhang situation over the past five or six years, and that there has been little progress made in terms of unsold properties and resolving the mismatch between supply and demand for the property market itself. Given the overhang stress that still remains elevated is unlikely to be resolved in the next two to three years, we do think that banks could potentially be impacted due to the imbalance from the property market, she said.