BBF2044 BANK MANAGEMENT

Trimester 1, 2020/2021

INDIVIDUAL ASSIGNMENT
Submission date: 28th SEPTEMBER 2020

Lecture Section: BM02

Student ID No.: 1201301677
Student Name: ER PEI QI

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Table of Contents
1.0 Introduction..........................................................................................................................3

2.0 Contents................................................................................................................................4

2.1 Significant effects on the Malaysian banking industry in the wake of the COVID-19
pandemic.................................................................................................................................4

2.1.1 The cost of credit risk in banking industry increase..................................................4

2.1.2 Net interest margin (NIM) shrinks.............................................................................4

2.2 To what extent is the aftermath of loan growth, liquidity, earning and capital?..............5

2.2.1 Loan growth...............................................................................................................5

2.2.2 Capital........................................................................................................................6

2.2.3 Earning.......................................................................................................................7

2.2.4 Liquidity.....................................................................................................................7

2.3 Discuss how this pandemic has affected individual and corporate borrowers.................8

2.3.1 Main problems faced by individual borrowers..........................................................8

2.3.2 Main problems faced by corporate borrowers...........................................................9

3.0 Conclusion..........................................................................................................................10

4.0 References..........................................................................................................................11

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1.0 Introduction
It is without a doubt that the COVID-19 situation has impacted global markets in
worldwide. Since the unprecedented global spread of the Covid-19 virus, banks have been
hit harder than most industries. Financial markets are in chaos. Banks’ performance on equity
and debt markets in worldwide since the COVID-19 outbreak and has faced a similar
situation after the collapse of Lehman Brothers in 2008. In Malaysia, the large-scale
continuous outbreak of this virus has become a serious threat with a profound impact on the
entire economy, financial institutions and financial markets. It is expected that financial
institutions and financial markets will collapse and a new global recession may occur. This is
an unprecedented challenge for our modern society and health system. The impact of the
pandemic on our global economy and financial sectors is unpredictable. The massive spread
of the virus also has affected the banking sector and stock market and this project will mainly
discuss in Malaysia’s banking system 2020.

Besides, the Prime Minister of Malaysia had implemented the imposition of a Movement
Control Order (MCO) for the period from 18 March 2020 until 31 March 2020 and it was
further extended to control the outbreak of Covid-19. However, the enforcement of the MCO
and lock down put all economic sectors in danger. For instance, this economic downturn
leads to debt and those who can work from home have stable incomes but non-permanent or
temporary workers are at risk of losing income especially in the most severely affected
industries such as manufacturing, mining, agriculture, construction, real estate, retail outlets,
tourism, automotive, food and beverages have been forced to shut down. As the country
closes industries and sectors, the economic impact has expanded and spread to most of the
world's economies. The impact is visible in the short term and will continue in the long run.
Then, a lot of workers in Malaysia especially in small and mid-size enterprises (SMEs) were
fired and other workers were given salary reduction, unpaid leave and so on. At that point of
time, many individuals and companies went bankrupt and the unemployment rate rose (Shah
et al., 2020).

Many individual and businesses now finding it difficult to keep up with their monthly
expenses. To ease their burden, Malaysia Government had announced Economic Stimulus
Package 2020 on 27 February 2020, RM250 billion stimulus measures called the PRIHATIN
Rakyat Economic Stimulus Package (PRIHATIN) on 27 March, additional measures for
SMEs on 6 April and PENJANA or Short-Term Economic Recovery Plan. The Minister of
the Prime Minister's Department (Economy) said that the impact of the COVID-19 pandemic

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has been alleviated and the road has been paved for economic recovery (The Edge Market,
2020).

2.0 Contents
2.1 Significant effects on the Malaysian banking industry in the wake of the COVID-19
pandemic
2.1.1 The cost of credit risk in banking industry increase
Covid-19 pandemic have a negative impact on profitability and credit management of
Malaysia banking industry. According to Said and Goh (2020), the most common challenge
face by the Malaysia banking industry is to monitor the credit developments in their portfolio.
This situation happening because the income of individuals and businesses have been
affected by the pandemic. Therefore, Bank Negara Malaysia (BNM) and the Malaysian
financial industry are committed to assist individuals and viable businesses by announced
measure of six-month moratorium on all loan repayments, effective on 1 April 2020 and until
30 September 2020 to ease their monthly burden (Bank Negara Malaysia, 2020). Besides, the
outstanding balance of the credit card can be converted into a three-year loan with reduced
interest rates. (Ong & Chee, 2020).

Moreover, since the Movement Control Order (MCO) came into effect on March 18, the
economy this year is expected to contract due to the stagnation of business activities.
According to the Said and Goh (2020), Dr Yeah Kim Leng said that “As social and business
activities are shut down and movements restricted to contain the virus spread, the loss of
business income and retrenchments are expected to contribute to the rise in loan defaults.”
This is because over-leveraged companies or individuals cannot continue to repay their debts
due to continuous business losses and layoffs even if the moratorium has ended. For example,
the businesses will still struggle because the households are no longer spending and this cause
more businesses start to fail and may face default notices for non-payment of loan, leases,
rent and so on. These are the evidences show the increasingly credit risk of bank industry.
Then, increase in credit costs will affect profitability of banks due to the deterioration of asset
quality.

2.1.2 Net interest margin (NIM) shrinks

According to Aman (2020), net interest margin NIM will contract with most banks in 2020 as
the Bank Negara lowered the policy rate and led to a decline in lending rates due to the
COVID-19 pandemic and MCO. NIM is a profitability indicator of financial stability of

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investment firms or banks. Only the higher NIM would increase the profitability of the banks
and negative NIM means that the banks have been unable to make full use of its assets now
because the interest income generated by the investment failed to pay the interest expense. In
overall, if the non-performing assets (NPAs) rise, the interest earned by bank would fall. On
the other hands, MIDF Research stated that the contraction of the NIM is due to the impact of
interest rate cuts. Next, NIM also may be weakened based on other factors including the
relaxation of regulatory requirements like Net Stable Funding Ratio (NSFR) and Liquidity
Coverage Ratio (LCR) which mean there is less demand for banks to compete for deposits
during the epidemic. In addition, depositors may be unwilling to lock up their deposits for a
long time (Muhammed, 2020). NIM compression is because the continuous cuts in overnight
policy rate (OPR) which lowered by Malaysia central bank and it also may reduce the bank’s
net profit.

In addition, Muhammed (2020) had indicated that the impact of the Covid-19 pandemic on
the global economy is serious and economic activity in Malaysia shrank sharply in the second
quarter due to measures taken to curb economic growth on 8 July in The Edge Markets. So,
to help businesses and households reduce their monthly loan obligations, Bank Negara has
cut the another 25 basis points of overnight policy rate (OPR) which shows in Monetary
Policy Statement on 10 Sep 2020 and decided to maintain the OPR at 1.75 percent, the lowest
level record since 2004. Besides, there is a total of 125 basis points reduction of the OPR in
this year. Lower OPR means lower interest margins of bank loans and continue to stimulate
the economy in this year. Then, the Bank Negara (2020) will continue to work hard to use its
appropriate policies to create favorable conditions for a sustainable economic recovery in
.The central bank of Malaysia will continue to work to use its appropriate policy levers to
create favorable conditions for a sustainable economic recovery.

2.2 To what extent is the aftermath of loan growth, liquidity, earning and capital?
2.2.1 Loan growth
The Malaysia’s banking industry is expected to be restricted this year particularly in term of
loan growth and income under the influence of the COVID-19 pandemic. Based on Borneo
Post (2020), due to the 2019 coronavirus disease outbreak and other long-term uncertainties,
loan growth in the Malaysia’s banking industry is expected to remain sluggish while asset
quality may weaken. Affin Hwang Investment Bank Bhd also stated that their loan growth
may slow from 3.9% in 2019 to 3% in 2020. So, it is expected that deposit competition in
2020 will ease. Besides, Khairul Kamarudin as Chief Executive Office said that Bank

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Muamalat Malaysia Bhd lowered its loan growth forecast for this year from the initial 13% to
7% due to the wavering of household and business demand due to Covid-19 (Kamel, 2020).
He also said that the retail sector will maintain demand for loans, including, personal,
housing and auto financing and the modification loss has severely affected the bank's
profitability. According to statistics from Bank Negara Malaysia (BNM), as of January 2020,
the banking industry’s loan exposure to retail, wholesale, hotel and restaurant industries are
7.3% while the transportation and manufacturing industry’s loan exposures are respectively
6.8 % and 2.3% (Borneo Post, 2020). Last, according to Malay Mail (2020), Maybank
expects loan growth to remain silent in the second half of 2020. Group president and CEO,
Datuk Abdul Farid Alias expected that due to the impact of the Covid-19 pandemic, demand
for loans will slow down. However, loans in the consumer sector are expected to remain
stable and continue to grow but the demand for loans in non-retail sector is still attributed to
the slowdown of the global trade and investment cycle and China's weakness. Jessica Chow,
Deputy Governor of Bank Negara Malaysia, said: "In this environment, we should expect
non-performing loans (NPLs) to increase because some companies will continue to face
difficulties." and Latorre et al. (2020) stated that banks in stressful industries like hotels,
restaurants, tourism, oil and gas and so on may face an increase in NPLs and deterioration in
asset quality. The increase in NPLs will overtake loan growth in Malaysia bank industry.

2.2.2 Capital
In this environment, economic recession may have a serious impact on the capital of financial
institutions because of their profitability and assets decline in quality the most common and
significant effects on the Malaysian banking industry in the wake of the COVID-19 pandemic
are the cost of credit risk increase due to the deterioration of asset quality and net interest
margin (NIM) shrinks due to due to interest rate cuts because both of these effects will
directly affect profitability of banks (Aman, 2020). According to Goh & Lee (2020), there are
many economists state that the current level of financial system capital buffers are strong
enough to cope with the Covid-19 pandemic. In addition, except the measure of loan
moratorium has taken, Bank Negara also had announced that banks may drawdown on the
capital conservation buffer of 2.5% to accommodate credit expansion. The purpose of the
capital savings buffer is to absorb losses and buy time for capital recovery plans when banks
are in financial trouble (FintchRatings, 2020). Then, based on Kaur (2020), Tan Ei Leen, as a
research analyst at Affin Hwang Capital predicts that the impact of the new measures on
banks will be negative like six-month financing repayments because it will put pressure on

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banks’ liquidity and working capital and banks also need to support their own operations like
pay interest expenses, overheads and loan activities. However, Chen, another analyst states
that although the bank's cash flow will be temporarily affected but the reduction of capital
buffer funds can help maintain bank’s business operations. So, Lee Heng Guie, an executive
director of the Associated Chinese Chambers of Commerce and Industry of Malaysia’s
Socio-Economic Research Centre states that all the banks in Malaysia are well capitalized
and with their strong and sufficient capital, they can survive this economic downturn and
absorb potential losses.

2.2.3 Earning
As expected, the earning of most banks fell sharply in the April to June quarter, which was
affected by the COVID-19 pandemic and full impact of the MCO as well as hurt by the new
measures by Bank Negara overnight rate cut caused the interest rate to fall (Raj, 2020). For
instance, CIMB Group Holdings Bhd reported that its net profit for the second quarter ended
June 30, 2020 fell 82% to RM277.08 million from RM1.51 billion a year ago. This is due to
the challenging economic crisis and modification loss due new measures taken by central
bank. Public Bank, RHB Bank and Hong Leong Bank also performed poor earnings mainly
due to the modification loss (Lim, 2020). Prime Minister Muhyiddin Yassin mentioned that
due to the suspension of all commercial activities, Malaysia lost an estimated 2.4 billion
ringgits a day during the MCO period, a total of 63 billion ringgits. Besides, according to
Sunbiz (2020), the net profit of Public Bank Limited in the second quarter ended June 30,
2020, fell by 24.8% to RM1 billion from RM1.33 billion a year ago. This was mainly due to
the one-off net profit related to Covid-19 relief measures. The revised loss amounts to MYR
498.4 million and its earnings fell 15.3% to 4.74 billion ringgit. Besides, Malayan Banking
Bhd’s net profit fell 51.5% to 274.73 million ringgits from last year’s 1.94 billion ringgits.
Therefore, Bank Negara Malaysia which further reduced the overnight policy rate which will
greatly affect the bank's net interest margin and definitely will affect its earnings in the
second half of 2020 (Jalil, 2020). A lot of economics predict that banks will have a certain
impact on earnings this year and next under this current environment due to the slowing
down of loan growth, credit costs may increase and so on.

2.2.4 Liquidity
To resist the challenges of economic downturn due to the COVID-19 pandemic. Bank Negara
Malaysia had announced some measures especially the loan moratorium. However, this
measure will be negatively to the banking sector in the near future because banks may face

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liquidity tightening, cash inflow will be greatly reduced and liquidity will be exhausted in the
money market. Besides, as liquidity dries up, financial institutions are expected to continue to
support loans and financing. During this event, financial institutions may find themselves
struggling to meet Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR).
So, Bank Negara had announced a new measures in 2020 which is supplied daily ringgit
liquidity to banks and allowed banks to operate below the minimum requirement LCR of
100% and lower NSFR to 80% (Ong & Chee, 2020). NSFR is a liquidity standard that
requires banks to maintain stable funds regarding their asset composition and off-balance
sheet activities. NSFR focuses more on long-term liquidity of the bank to fulfill its promises,
rather than short-term liquidity like LCR. According to G. Kaur (2020), RHB Bank stated
that it has sufficient liquidity to manage the cash flow used by its individuals and small and
medium-sized enterprises to repay loans during the six-month automatic suspension period.
For instance, it may lower its LCR but it must not be less than 100% compared to last year
which stood at stood at 152.7% and follow the measures set by Bank Negara as well as
maintain NSFR slightly above 100% (The Star, 2020). Then, based on Kong (2020), Hong
Leong Bank's liquidity is about 85% and its LCR exceeds 130% in this current environment.
Although there are the measures of automatic moratorium and daily ringgit supplied by Bank
Negara Malaysia, analysts still believe that Hong Leong Bank can survive a period of
significant liquidity stress because it hold sufficient liquid assets and high requirements of
LCR.

2.3 Discuss how this pandemic has affected individual and corporate borrowers
2.3.1 Main problems faced by individual borrowers
The most common problems faced by them during this period are lost their jobs in 2020 and
suffered from a drop in income due to the COVID-19 pandemic (Malaysia Kini, 2020). Most
of the individual borrowers unable to repay the loan and pay the debt due to the financial
constraints. So, to ease the burden of individual borrowers, Bank Negara provide loan
repayment flexibility to borrowers which is called restructure & reschedule (R&R) for their
loans. For information, the banking industry will postpone the extension in a targeted manner
and provide the following repayment flexibility. This measure is mainly for individuals who
have lost their jobs by 2020 but have not found a job will be extended by the bank for a three-
month loan suspension period. Then, for the individuals who are still working but whose
salary has been affected by COVID-19 will be reduced in installments according to the type
of loan according to the proportion of their salary reduction. For example, Mr Muhyiddin

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stated that “For a house or personal loan, the monthly payment will decrease at the same rate
as your salary reduction. This assistance must last at least six months and can be extended
according to the individual's salary (Tan, 2020).” Then, for hire purchase financing, affected
borrowers will be provided with a revised installment schedule which is consistent with the
Hire-Purchase Act 1967 based on Bank Negara Malaysia website 2020.

2.3.2 Main problems faced by corporate borrowers

The problems faced by the corporate borrowers also similar with individual borrowers. They
also face difficulties in loan repayment and cash flow issues arising from the COVID-19
pandemic. These problems are adversely affected the operation’s companies or enterprises of
corporate borrowers like liquidity, capital and may cause salary cuts, layoffs, unpaid leaves,
bankruptcy, cut into shareholder profits and so on. In addition, the bank also promised to
provide other individuals and all corporate and SME borrowers affected by COVID-19 with
repayment flexibility once the six months loan moratorium expires. Banks are opening for
borrowers to apply for help in loan repayments before September 30 and borrowers must
readjust spending start from Oct 1 (I. Lim, 2020). The repayment flexibility provided by each
bank will take into account the specific circumstances of the borrower. This includes: Allow
the borrower to pay only the interest part of the loan for a period of time; Extend the total
loan term to reduce monthly installments; or Provide other forms of flexibility until the
borrower is in a more stable state to repay the repayment in full. All other capable borrowers
should start repayment as this will reduce their total debt and borrowing costs based on Bank
Negara Malaysia website 2020.

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3.0 Conclusion
In a nutshell, COVID-19 has heavy financial burden towards markets and global banking
sector. Banks are playing a key role in maintaining health credit system. They are called to
ensure necessary liquidity. The real economy also conveys trust and reliability to the end
customer. On the road to recovery, bank institutions are facing a series of operational issues,
including special losses are mainly due to high loan impairment, source of credit and risk
management, digital customer relations and agility business model, drive operational
efficiency and business continuity management and funds and liquidity. Apart from that, the
most common challenges are income pressures and low profit margins, stricter supervision
and increased competition from shadow banking and new digital entrants (Carletti et al.,
2020).

During the COVID-19 and MCO, a lot of banks such as Public bank and Hong Leong
bank had managed their credit portfolio and credit risk in this current environment so they
can respond preemptively to reduce the cost. Therefore, banks are more agile in credit
monitoring and credit evaluation to avoid any cost of credit risk, risk of defaults and non-
performing loans. For instance, who want to buy new house in this point of time will apply
the mortgage loan from bank. The screening process of applicant’s financial status and
monthly income condition become more strictly by the bank compared to previous time.
Every applicant need to prepare and submit all the required documents such as pay slip latest
6 months, latest EPF statement 2020, latest 6 months of bank statement to confirm salary
amount, latest company confirmation letter and so on to bank for evaluating and the bank
reserves the right to withdraw loan approvals and adjust loan regulations without prior notice.

Moreover, the BNM deputy governor also states that “Since then, Malaysia’s financial
system has built a strong capital base to withstand major economic shocks and absorb
potential losses, thanks to enhanced risk management, liquidity management, assets-liabilities
management as well as asset quality management.” (Yeah, 2020). Therefore, the Malaysia’s
banking industry definitely can handle COVID-19 challenges with strong buffer, better
quality of loan book and institutional arrangement. Finally, banks nowadays want to retain

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well positioned and maintain the competitive advantage. They should consider how they will
achieve the desired results and avoid the risk of failure while ensuring customer experience
especially during the economic downturn. For instance, banks require long term strategic
management such as provide suitable services to every single community and customer based
on their condition, emphasize their benefits and transformation is necessary (Warren, 2020).

4.0 References
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Covid-19 | New Straits Times. NST Online.
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growing-pressure-covid-19
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 Borneo Post. (2020a, March 15). Banks’ loan growth, asset quality affected by Covid-
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 Business Today. (2020, April 20). The impact of COVID-19 on Malaysia’s looming
digital banking revolution - Business Today. Https://Www.Businesstoday.Com.My/.
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 Carletti, E., Fatás, A., Vives, X., & Claessens, S. (2020, June 18). Challenges of the
banking sector after the covid-19 crisis. Www.Santander.Com.
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 FintchRatings. (2020b). Coronavirus DM Bank Buffer Breaches May Not Trigger
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 Goh, J., & Lee, E. (2020, May 3). Malaysia’s banking system can handle Covid-19
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 sands.pdf
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 Lim, J. (2020, August 29). CIMB, Public Bank, RHB Bank, Hong Leong Bank,
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 https://www.nst.com.my/news/nation/2020/05/588982/pm-malaysia-has-suffered-
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