Bank Negara: Local lenders remain resilient

PETALING JAYA: The recovery in earnings, pre-emptive provisioning practices, and active risk-management strategies are expected to continue to support the resilience of banks moving forward.

Bank Negara said this in its Financial Stability Review (FSR) report for the second half of 2021, adding that going forward, monetary policy normalisation in advanced economies could lead to outflows from emerging market economies, including Malaysia, and therefore, raise funding costs.

“Domestically, a preference for higher-yielding fixed deposits among depositors as uncertainty subsides, and banks’ renewed competition for deposits to support loan growth as the economy recovers, could also put upward pressure on funding costs,” said the central bank.

The impact of the developments on banks is, however, expected to remain manageable due to their strong liquidity and funding positions, it added.

The report, which is Bank Negara assessment on the current and potential risks to financial stability and resilience of the Malaysian financial system, noted that the banking system profitability was sustained in the second half of 2021, supported by the pick-up in lending activities and low funding costs which preserved net interest margins.

After recording a strong growth in 2020, due largely to the blanket loan repayment moratoria, growth in household deposits has normalised closer to pre-pandemic, according to the central bank.

“Overall deposit growth was also supported by an increase in deposits placed by non-residents. This reflected portfolio inflows into the bond market during the second half of 2021.

“A sizeable (36%) share of total deposits remained in the form of current and savings accounts (CASA) deposits, keeping banks’ funding costs low and relatively stable.”

It said banks benefited from low funding costs throughout last year as the growth of cheaper CASA deposits (up 12.1%) outpaced that of higher-yielding term deposits (up 2.2%). The flexibility provided for banks to use holdings of the Malaysian Government Securities to meet the Statutory Reserve Requirement also contributed to higher interest income as banks allocated excess liquidity into domestic government bonds, it said.

This has helped to cushion the impact of elevated credit costs, modification losses from ongoing repayment assistance and lower income from trading and investment activities amid rising bond yields.

The central bank also said the latest stress tests affirmed the banking system’s capacity to absorb higher credit losses under severe macroeconomic conditions.

“Banks are also not expected to prematurely release provisions, particularly for their household and small medium enterprises portfolios, until greater visibility on borrower repayment behaviour is gradually restored.

“Additional modification losses from further repayment assistance for distressed borrowers is also expected to moderate as economic conditions improve.”

It said banks maintained strong capitalisation levels, with excess capital buffers above the minimum regulatory capital requirements of RM135.4bil.

“The buffers provide banks with an important safeguard against any potential unexpected losses that may materialise amid a still challenging operating environment.

“This in turn preserves banks’ capacity to support households and businesses’ financing needs through the cycle.”

Bank Negara noted that in line with the improvements in overall profitability in 2021, banks had paid out higher dividends to shareholders although several of the larger banks have continued to conserve capital by implementing dividend reinvestment programmes.

It said in the second half of 2021, the domestic banking groups’ (DBGs) overseas operations mostly remained profitable.

However, performance across key markets was mixed relative to the first half of the year.

Earnings from the largest operations (by asset size) of DBGs in Singapore declined, largely due to higher provisions made amid elevated credit risks, especially among selected corporate borrowers, it said.

“In contrast, profitability from operations in Indonesia and Thailand posted marginal improvements in line with economic recovery.”Meanwhile, operations in Hong Kong continued to register losses, it noted, following a further deterioration in asset quality among specific large borrowers.

However, the spillovers from operations in Hong Kong to Malaysian parent banks are limited given the relatively small contribution to groupwide earnings, it said.