Bank Negara: Banking system can withstand ‘extreme shocks’

ALTHOUGH much uncertainty prevails amid the current global Covid-19 virus outbreak, the Malaysian banking system remains resilient, thanks to strong capital buffers - a result of prudent measures - undertaken over the years.

Bank Negara governor Datuk Nor Shamsiah Mohd Yunus says that in recently conducted stress tests on local financial institutions, it was indicated that lenders could withstand “extreme shocks.”

“The results affirmed that they have access capital that will be enough to absorb significant losses, ” says Nor Shamsiah.

Nor Shamsiah notes during the release of the central bank’s economic, monetary and financial stability reports, held through video conferencing, that local financial institutions had a total capital ratio of 18.4% as of February 2020 compared with 12.6% in 2008, the height of the global financial crisis (GFC).

The higher the ratio, the better, as it indicates that a bank has more funds to cover the amount of risks that it takes on.

In terms of excess capital buffers, the figure stands at RM121bil now compared with RM39bil 12 years ago.

Liquidity buffers, which act as a buffer against any shortfall in money, are at 148% against an average of 137% over the years of 2015 to 2019.

Increased provisions, weaker credit growth

Nevertheless, banks are expected to experience some negative impact on their performance at least for this year, if not longer.

First, in the wake of the Covid-19 virus outbreak, banks are expecting an increase in the share of restructured and rescheduled loans, particularly by borrowers in the business segment that have been most vulnerable to the pandemic.

In its financial stability review report, the central bank says this is likely to increase provisions over the short term.

However, it notes that banks are well-positioned to absorb the potential impact on their profitability.

Active monitoring and recovery efforts also saw several banks record impairment reversals on selected large credit accounts in December, thus sustaining overall asset quality, according to the central bank.

Meanwhile, the economic impact of the pandemic in the region will also continue to weigh on the performance of domestic banking groups’ overseas operations, it says.

While Malaysia remains the country with the highest number of known infections in South-East Asia with more than 3,000 confirmed cases, neighbours like Singapore and Indonesia have also seen an increase in recent days, suggesting that the battle is not yet over.

“Domestic banking groups’ operations in Singapore, which account for almost half of total overseas assets, continue to face headwinds amid the challenging operating environment.

“The impairment ratio remains elevated at 3.8% from 3.5% in June 2019, due to higher new impairments relative to recoveries during the period, ” Bank Negara says, adding that in Indonesia, local lenders recorded higher loan loss provisions amid the more moderate domestic growth performance, with the impairment ratio rising to 4.1% from 3.6% in June last year.

For 2020, banks are also expecting weaker credit growth compared to last year. However, this remains significantly dependent on the duration of the pandemic.

While the impact of Covid-19 on the economy is likely to be significant in the short term, the central bank says banks are entering this period from a position of strength.

“In addition, banks’ digitalisation strategies are expected to drive further operational efficiencies, lending additional support to long-term profitability and overall viability.”Notably, as part of its response to the pandemic, the central bank has announced a series of regulatory measures to help banks assist affected households and businesses.

Banks, for instance, are now allowed to draw down on capital and liquidity buffers, to support lending activitties.

These buffers, which have been built up over the years along with liquidity management by the central bank, have placed banks in a strong position to support the economy during these challenging times, Bank Negara says.

The sustained profitability of banks, it adds, underpinned by sound underwriting and risk management practices, will also help banks gradually restore their buffers once the situation allows for it.

Banking analysts concur that while the entire banking system is now on a much stronger footing having withstood the effects of past crises, lenders will not escape short-term negative impact.

Complete standstill

A complete standstill in loan growth in the next few months as a result of the disruption by the movement control order (MCO) implemented due to the Covid-19 situation, for one, is expected for local lenders.

Analysts say they are slashing their loan growth projections, given the negative impact from the MCO and overall slower economic growth which is tied to the lending business of banks.

“We have cut our projected 2020 loan growth for banks from 3%-4% to 0%, given the expected contraction in gross domestic product and the negative impact from the MCO, ” CGS-CIMB says in a report.

Maybank IB Research banking analyst Desmond Ch’ng, meanwhile, says the current Covid-19 situation could see up to a 49% slash in profit estimates for the entire banking sector.

This possible worst-case scenario assumes four overnight policy rate (OPR) cuts this year, flat loan growth and a spike in credit costs.

This is compounded by an oil crisis, with oil prices having fallen to a multi-year low of US$28 per barrel now from an average of US$64 in 2019, Ch’ng points out.

More recently, Moody’s Investors Service downgraded Malaysia’s banking system to negative from stable to reflect growing risks from the virus outbreak.

“Asset risks for banks will increase while their profitability will decline amid deteriorating economic conditions in the next 12-18 months.

“Still, robust loan-loss reserves and capitalisation will provide a buffer against growing risks, ” the global ratings agency said.

To be sure, it has also changed its outlook on 12 Asia-Pacific banking systems to negative in view of the outbreak and overall economic deterioration.

While the situation remains fluid from all aspects, one clear difference between the current conditions and the last time the world had a major economic crisis is that this is not a banking crisis.

“Unlike the GFC which started as a mortgage crisis, this is more of a health crisis, which has put a sudden stop to most economic activities and hampered consumer spending.

“But the moment a vaccine for the virus is found, things can get back to normal, albeit very gradually and not without casualties...let us continue to hope, ” remarks a banking analyst.