PETALING JAYA: Despite potential stress ahead, the banking industry remains resilient but risks are still present, said analysts.
According to AllianceDBS Research, this has been observed based on recent Bank Negara data in the Financial Stability and Annual Report for the second half of 2019.
“The central bank noted the sector’s strong buildup of capital above the regulatory requirement of around RM121bil (RM119bil as at end-2019) and the loss absorption capacity following certain stress scenarios on households as well as large corporates, ” the research house said.
“Based on Bank Negara’s stress scenarios on house prices and income levels, potential losses to the banking system account for up to 36% of their excess capital buffers (or RM58bil), ” it added.
AllianceDBS said risks are still present in broad property, oil and gas (O&G) and Covid-19- impacted tourism and manufacturing sectors.
“Notably, 56% of the potential losses from property sector debt-at-risk (itself 5.5% of total property exposures) stem from loans to the small and medium enterprises (SMEs) and small corporates for construction and purchase of non-residential properties, ” it said.
AmBank Research said in its report that it believes the risk of banks’ exposure to large borrowers will be mitigated by repayment contracts secured against long-term contracts, collaterals, government guarantees and measures by borrowers to conserve cash flows.
“Banks’ exposure to large borrowers in the vulnerable sectors reeling from the effects of the Covid-19 pandemic classified under stage two and three was less than 4% of the total loans in the banking system, ” it said.
It noted that a sensitivity analysis was also done by the central bank on large borrowers.
“These borrowers still had interest coverage ratios of above 1 time after applying shocks with a 15% depreciation to our domestic currency, 100 basis points increase in the borrowing cost, and 50% decline in their operating profits, ” it said. AmBank Research said it has retained its “neutral” call on the sector with headwinds to interest margins from further rate cuts and potentially higher provisions over the short term.
“The Covid-19 pandemic has caused supply chain disruptions as well as impacted consumption expenditures. Nevertheless, we see pent-up demand after the pandemic subsides with a gradual recovery in banks’ interest margins from the overnight policy rate cuts, ” it said.
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