Banks’ total provision under MFRS 9 could rise at least 30%

KUALA LUMPUR: CIMB Equities Research sees the total provisions for Malaysian banks could increase by between 30% and 70% with the adoption of the Malaysian Financial Reporting Standards (MFRS) 9.

It said on Tuesday as part of this will be transferred from retained earnings, it will lower banks’ Common Equity Tier 1 (CET1) capital ratios. 

“However, we are not overly concerned about this as banks have strong buffers, with high CET1 capital ratios and strong regulatory reserves. 

“We do not think that banks will need to embark on cash calls with the MFRS 9 adoption,” it said.

Tier 1 common capital ratio is a measurement of a bank's core equity capital compared with its total risk-weighted assets that signifies a bank's financial strength, according to Investopedia.

MFRS 9, which comes into effect on Jan 1, 2018, updates classification and measurement, impairment and hedge accounting for financial instruments.

CIMB Research said on Nov 1, it attended an expert speaker session by Ernst & Young on banks’ adoption of the MFRS 9 accounting standard. 

“We gathered that Malaysian banks are on track for MFRS 9 adoption in 2018. But the key positive surprise from the meeting was the revelation that the negative impact on banks’ yearly credit costs, and ultimately net profit, from the MFRS 9 adoption may not be as severe as we had previously feared.  

“MFRS 9 adoption could impact banks in two ways. It could (1) lower banks’ capital ratios arising from the first-day upward adjustment of total provisions, and (2) increase normalised credit costs due to higher provisions needed for new loans,” it said.

The research house said the increase in banks’ yearly loan loss provisioning (LLP) will not be significant upon MFRS 9 adoption. 

As such, it thinks that banks’ LLP could rise by about 10% upon adoption of MFRS 9 instead of 10% to 50% anticipated previously. 

“A 10% rise in our projected LLP would trim our net profit forecasts by 1.7% for FY18F and 1.4% for FY19F. 

“There will be two other new accounting standards – MFRS 15 (revenue from contracts with customers, effective Jan 1, 2018) and MFRS 16 (leasing, effective Jan 1, 2019). 

“The impact from MFRS 15 will be minimal for banks. However, the MFRS 16 adoption will raise banks’ value of lease assets (banks rent most of their branches), lifting their total risk-weighted assets. The impact is a potential reduction in banks’ CET1 capital ratios,” it said.       

CIMB Research pointed out it has not factored the impact of MFRS 9 adoption into its earnings projections and it believe neither has Bloomberg consensus given the lack of guidance from banks’ management. 

“Hence, we and the market are likely assuming best-case scenarios. We are of the view that even though the impact on earnings from MFRS 9 may be less significant that our earlier estimation, it will still have a negative impact on sentiment for banks.    

“We remain Neutral on banks given the decade-low loan growth and the expected resumption of margin contraction in 2018. 

“While the negative impact from MFRS 9 may be less severe than we previously thought, credit costs could still be higher for new loans upon adoption. Upside/downside risks are recovery/collapse in loan growth,” said the research house.