Modification loss refers to the difference between the originally contracted cash flow and the cash flow once terms of a loan are changed.

Maybank Investment Bank Research’s analyst Desmond Ch’ng said in a note today that the announcement of the moratorium is likely to cause banks’ share prices to dip in the near term, given uncertainties over any potential impacts from modification losses.

“Nevertheless, in our worst-case scenario, which assumes a mod loss of similar quantum to 2020’s modification loss, the impact to earnings would be quite manageable at 0% to 6% for most banks, in our view,” The Edge quoted him as saying.

He added that in comparison to the opt-out moratorium from last year, borrowers will need opt-in for the new deferment programme and may need to sign revised terms to their agreement this time around.

Meanwhile, Affin Hwang Capital’s analyst Tan Ei Leen said this latest repayment freeze was unlike the 2020 moratorium where interest did not accrue on deferred instalments. Borrowers, particularly those not affected financially by the pandemic, are less incentivised to opt-in this time.

According to her simulations, a potential RM1 billion modification loss would result in only a 3.2% contraction on the sector’s earnings for this year, while the impact on sector price-to-book value appears minimal.

Hong Leong Investment Bank Research’s analyst Chan Jit Hoong agreed that the opt-in loan moratorium is unlikely to have a significant impact on banks.

“Day 1 modification loss is a non-cash accounting entry and is gradually reversible in the future. Thus, we are treating it as an exceptional item,” he said.