Bank Negara: Financial Stability Review 2H 2019 highlights

Apartment blocks stand beside an empty highway at Jalan Bulatan Kampung Pandan in Kuala Lumpur, Malaysia, on Wednesday, March 18, 2020. Prime Minister Muhyiddin Yassin said late Monday that the country will be limiting non-essential businesses operations as well as banning all visitors from entering the country and residents from traveling overseas from March 18 for two weeks. Photographer: Samsul Said/Bloomberg

Main points of Bank Negara Malaysia's Financial Stability Review 2H 2019:

Household debt:

* Ratio of overall household debt-to-GDP rose to 82.7% end-2019

* Most households can comfortably service their debt, growth in household financial assets continue to outpace that of debt.

* Most household borrowers resilient to a significant decline in house prices and income shocks.

* Share of borrowers from vulnerable income group fell to 17.6% of total household debt.

* Exposure-at-risk for housing loan borrowers with variable income remained low at 2% of total banking system loans.

* Outstanding household financial assets and liquid financial assets broadly stable at 2.2 times and 1.4 times of debt, respectively.

* Share of borrowings by vulnerable segment (borrowers with monthly earnings of less than RM3,000) continued to decline in 2019. Risks remain elevated.

* Vulnerable segment’s leverage levels remain high at about 9 times in 2H 2019, mainly due to borrowings for the purchase of homes. Will face greater difficulty maintaining debt repayments in times of stress.

Property market:

* Number of unsold housing units remains elevated. House prices remaining seriously unaffordable.

* Average volume of newly-launched residential properties priced below RM300,000 fell in recent quarters (quarterly average for 1Q-3Q 2019: 6,518 units; 1Q-3Q 2018: 9,777 units), despite strong demand from households.

* Latest data shows declining share of new launches in this property segment (1Q-3Q 2019: 35%; 1Q-3Q 2018: 37%),

* At 3Q 2019, incoming supply of office space in Klang Valley at 36.2 million square feet, or 30% of existing supply.

* Estimated 5.5 million square feet of office space will be completed each year until 2021 vs average annual demand of 2.3 million square feet per annum over the past three years.

* Completed and planned shopping complexes in key states rose further to 373 units as at 3Q 2019 (from 372 units as at 1Q 2019).

* Loans for purchase of residential properties were about two-thirds of banks’ total exposures.

* Risks from bank exposures to housing loans rose slightly but they remained low.

* Banks’ exposures to office space and shopping complex below 4% of banking system loans.

Financial institutions:

* In 2019, over 365,000 home financing accounts were approved, amounting to RM158 billion where more than half were to first-time home buyers. Over 100,000 accounts for purchase of affordable homes costing below RM300,000.

* New loans in the non-residential property segment shifted away from the higher risk office space and shopping complex segment to loans for the purchase of shoplots, industrial buildings and factories.

* Debt-at-risk for the property sector manageable at 5.5%. Banks’ excess capital buffers can cover three times estimated potential losses.

* More than half (56%) of these potential losses from loans extended to SMEs and small corporates for construction and purchase of non-residential properties.

* Operating environment for businesses to remain highly challenging in the immediate period ahead.

* Covid-19 adversely affected businesses, especially tourism and manufacturing sectors as a direct result of travel and production disruptions.

* Tourism and manufacturing account for 44% of banks’ business loan exposures and about 16% of total loans from the banking system.

* Banks’ overall loan exposure to construction sector fairly stable at about 14% of total business loans.

* Financial positions of oil and gas companies continued to recover. Debt restructuring by some firms have strengthened their debt-servicing ability.

* Leverage reduced further to 37.5% (1H 2019: 42.8%) while debt servicing capacity improved to 3.8 times (1H 2019: 3.6 times; 5-year average: 3.8 times).

* Financial institutions’ exposures to large borrower groups fell to 38.4% (1H 2019: 42.1%) of total business exposures as at end-2019.

Outlook for banking sector:

* Growth in net interest income from financing activities, about two-thirds of banks’ gross income, moderated. Reasons - slower credit growth and further compression in banks’ interest margins.

* Drag on banks’ earnings to be cushioned by higher non-interest income, continued loan growth and lower debt-servicing burdens of borrowers.

* Due to Covid-19 pandemic, banks expect increase in the share of restructured and rescheduled loans, particularly by borrowers in the business segments most affected by pandemic. Increased provisions over the short-term.

* Banks well-positioned to absorb potential impact on profitability due to prudent provisioning buffers built up over the years.

* Total provisions including regulatory reserves held by banks against credit losses at RM33.9 billion or 126.4% of impaired loans as at end-2019.

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