KUALA LUMPUR: Banks in Malaysia have sufficient buffers to absorb potential cumulative losses of RM85bil arising from the direct exposure and spillovers to the related property sector under a worst-case scenario.
In its annual report issued on Wednesday, Bank Negara Malaysia said roughly one-third of the losses can be attributed to residential mortgages.
“Taking into consideration banks’ earnings buffers, the overall common equity tier-1 capital ratio is expected to decline by 3.2 percentage points, remaining well above the minimum regulatory requirement,” it said.
The central bank undertook a sensitivity analysis on whether banks can absorb potential shocks from the property sector.
Bank Negara said as demonstrated by Malaysia’s own experience during the Asian Financial Crisis, adverse developments in the property market, if left unchecked, can have severe repercussions on financial stability.
This saw it conducting a sensitivity analysis to assess banks’ ability to withstand shocks arising from a simulated sharp correction in the property market.
The sensitivity analysis simulates: (i) an increase in impairments to levels that are comparable to the worst default experienced by the industry (1997-2001); and (ii) a 50% decline in property prices i.e. a reversal of the five-year cumulative price growth since 2012.
The shocks are applied not only on the end-financing portfolio of banks, but also on financing to industries that are highly dependent on the performance of the property sector – property developers and real estate services (including ancillary business activities such as legal and architectural); non-infrastructure construction; and building and construction-related materials (BCM) manufacturing sectors.
In total, banks’ overall credit exposures (including investments in bonds and sukuk) to the property market and such related sectors stood at RM933 billion or 52% of banks’ total credit exposures as at end-December 2017.
Results of the analysis indicate that banks have sufficient buffers to absorb potential cumulative losses of RM85bil arising from the direct exposure and spillovers to related sectors.