PETALING JAYA: The challenging business environment will be a drag on the non-residential property loans of local banks next year.

TA Securities said in a report that persistently weak commodity prices will continue to put a strain on cash flows and the businesses’ repayment capabilities.

“We believe the oil and gas (O&G) segment may also not be out of the woods on the back of extensive capital expenditure and operating expenditure cuts.”

The research house noted that Petroliam Nasional Bhd’s (Petronas) four-year plan to reduce expenditures by RM50bil over the next four years from 2016 would include the revision and negotiation of contracts.

It expects some default risk stemming from a glut in office and retail spaces given the challenging environment.

The non-residential property segment accounts for more than RM180bil or close to 15% of total loans in the system.

“Collateral values aside, the exposure exceeds the total collective and individual allowances of some RM18bil accumulated by the banks, thus far.”

TA Securities added that the total non-residential property loan exposure makes up 8% and 90% of combined asset size and shareholders’ funds, of the eight anchor banks in Malaysia.

“In comparison, overall exposure to the O&G segment accounts for less than 5% (or around RM70bil) of total loans of the eight banks under our portfolio.”

It said the industry remains well capitalised “to absorb any shocks and losses” despiteconcerns over asset quality .

“Predicting less recoveries and a more strenuous year in asset quality in 2017, we estimate total net credit charge for all the local banks under our coverage to increase to 188.5 basis points from an estimated 184.8 basis pointsthis year.

“Based on our sensitivity analysis, a 10 basis points increase in net credit charge for all the banks under our coverage would shave the sector’s net profit and average return on equity by 5% and 0.5% basis points respectively.”

It said application for credit card loans has increased by strong double-digit growth rates since 2015 with resilient asset quality.

“Application for personal loans has also accelerated although we believe banks have recently started to tighten their credit stance in that segment, resulting in four months of contraction between May 2016 and August 2016.

“Drawing similarities to the downturn in 2007 and 2008, we note that application for credit cards and personal loans also surged – presumably to help alleviate strains on cash flow.”

*Contact us at editor@starproperty.my.

*Subscribe to StarProperty on Facebook or WeChat for the latest updates.

***For more interesting articles in Chinese, download 《潮楼产业》PropertyTrends. Now available at Google Play and iTunes.