Moody’s: Malaysia banks’ adoption of MFRS 9 is largely credit neutral

PETALING JAYA: The adoption of Malaysian Financial Reporting Standard 9 (MFRS 9), the new accounting standard for financial instruments, is largely credit neutral, but will change how the country’s banks measure, reserve for, and report credit losses, Moody’s Investors Service said.

“The adoption of MFRS 9 does not affect our credit assessment of Malaysian banks, because the underlying economics of bank assets remain unchanged,” said Moody’s vice president and senior analyst Simon Chen.

Some banks have already adopted the standard — which is more forward looking with a broadened application — while others plan to do so at the start of their respective new financial years, it noted.

“We already incorporate forward-looking information into our assessment of a bank’s creditworthiness. That said, MFRS 9 represents a strengthening in credit practices because of its more proactive stance on requiring higher provisions on underperforming assets and the incentive it gives to the banks to undertake better credit monitoring practices to pre-empt unwarranted credit migration,” Chen noted.

Moody’s explains that MFRS 9 introduces the concept of expected credit losses (ECLs) as the basis for provisioning on all financial asset holdings. 

Under the reporting standard, all financial assets would count toward the computation of ECLs and therefore require provisioning from the first day of their origination, even if they are fully performing.

Moreover, MFRS 9 treats assets that are performing, but with increased credit risks, as underperforming assets and subjects them to higher ECLs. 

The regulatory minimum level of loss allowances under MFRS 9, and regulatory reserves now covers a broader pool of assets than the previous requirement, and hence attracts higher provisions. 

And, MFRS 9, which took effect on  January 1, is broadly similar to IFRS 9 in its introduction of the concept of ECLs as the basis for provisioning; contrasting with the model based on incurred losses under FRS 139.

Moody’s says that the day one adjustment to common equity tier 1 (CET1) ratios would be manageable for the banks, although it would affect capital ratios because the application of ECL on a broader coverage of financial assets would result in loss allowances that are in most cases larger than banks’ reserves under FRS 139.

Initial estimates from the six banks that Moody’s rates in Malaysia indicate a 0-80 basis point decline in CET1 ratios on Day 1 of MFRS 9 adoption.

However, some banks have indicated that the fair value treatment of non-loan financial assets under MFRS 9 could result in valuation gains and partly offset higher loss allowances.

The key recurring impact of MFRS 9 is that provisioning expenses would be more sensitive to the origination of new credit assets and credit migration drivers, such as changes in macroeconomic conditions and loan surveillance practices.

“Because we expect credit conditions in the Malaysian banking system to remain benign over the next 12-18 months, provisioning expenses under MFRS 9 will have only a limited effect on subsequent period earnings among Malaysian banks,” added Chen.