KUALA LUMPUR (Sept 29): Bank Negara Malaysia (BNM) said that while recovery prospects for the Malaysian economy remain subjected to some degree of Covid-19 pandemic-driven uncertainty, the domestic financial system is expected to remain resilient against potential economic and financial shocks as banks and insurers continue to have sufficient financial buffers to absorb potential losses under severe macroeconomic and financial conditions while sustaining support for economic recovery.
According to BNM’s Financial Stability Review report for the first half of 2021 (1H21) published on Wednesday, domestic financial stability continued to be firmly supported by a resilient financial sector. The ramp-up in provisions in 2020 has provided banks with some headroom this year to moderate the amount of additional provisions set aside for credit losses and support a recovery in profitability.
"This enabled banks to further extend debt repayment assistance to households and businesses that were affected by the most recent movement restrictions while sustaining lending activities. Similarly, insurers and takaful operators generally remained profitable and well placed to assist individuals and businesses by providing flexibility for premium and contribution payments that would preserve their protection coverage.
"In the domestic financial market, conditions have remained orderly. This is further supporting overall funding conditions for banks and corporates,” the central bank said.
BNM said banks in the country continued to take a forward-looking approach to credit risk management despite considerable challenges in updating assessments of borrowers’ creditworthiness.
This was partly due to the absence of more current loan repayment data, especially for borrowers enrolled under the various loan repayment assistance programmes, according to BNM.
"Throughout 1H21, banks continued to increase provisions for credit losses in anticipation of a deterioration in asset quality as repayment assistance programmes were gradually unwound. The loan loss coverage ratio remained around historically high levels, reflecting the higher degree of stringency in the provisioning practices of banks.
"Provisions by banks with significant retail exposure have also notably increased in recent months in response to the successive expansion of repayment assistance programmes. This continues to provide assurance that banks are reasonably well positioned to withstand higher-than-expected credit losses in the event of more adverse credit developments,” BNM said.
Malaysia’s business sector performance began to recover heading into the second quarter of 2021 (2Q21) amid the easing of pandemic-driven movement restrictions, BNM said.
The share of firms at risk declined from earlier peaks seen in 2020, although it remained higher than the average pre-pandemic levels due to continued challenges faced by firms in sectors that had been harder hit by movement restrictions, according to BNM.
"Overall business leverage has also improved in line with higher debt repayments by firms. The reimposition of stricter nationwide containment measures towards the end of 2Q21 could, however, see some of these financial improvements set back, particularly among smaller firms in the construction and services sectors, while prolonging difficulties that were already challenging firms in the tourism-related industries.
"This could lead to renewed pressure on the debt-servicing capacity of more affected firms. Repayment assistance programmes as well as support measures from the government and the bank (BNM) have so far contained any material increase in loan defaults. In particular, the cash flow relief from deferred loan repayments is helping small and medium enterprises (SMEs) cope better under renewed movement control restrictions, along with a positive impact from cost-cutting measures and increased digital adoption.
"Consistent with this, the share of SME loans assessed by banks to be of higher credit risk remained relatively modest despite an increase in SMEs that applied for [loan] repayment assistance in recent months. Banks also continued to lend to viable SMEs with various financing guarantee schemes remaining available to complement direct bank lending to these segments,” BNM said.
Meanwhile, most household borrowers in the country remained reasonably resilient with existing financial buffers and policy assistance measures providing a cushion against potential shocks, according to BNM.
BNM said loan repayment assistance extended by banks continued to provide support to distressed household borrowers, staving off further damage to their finances and, in turn, the economy and financial system at large.
"While this is helping to temporarily support borrowers’ debt-servicing capacity, a more entrenched economic recovery remains key to restoring longer-term financial health of borrowers.
"The share of household borrowers who have applied for [loan] repayment assistance has risen sharply in line with further expansion of repayment assistance by banks in June and July, but as observed prior to June, this is expected to decline again as the economy gradually reopens and households see less need to build up precautionary buffers.
"Importantly, new bank lending to the household sector continued to be underpinned by sound underwriting standards. The exposure of banks to higher-risk household borrowers with thinner buffers also remained low,” the central bank said.
Source: https://www.theedgemarkets.com/article/bnm-malaysias-financial-system-remain-resilient-against-economic-financial-shocks