Domestic financial system remains well-positioned

KUALA LUMPUR: The strong buffers of banks, insurers and takaful operators will continue to preserve the resilience of financial institutions against potential unexpected losses, according to Bank Negara.

“Assuming additional severe shocks applied on top of the bank's stress test, post-shock aggregate capital ratios as at end-2023 remain comfortably above regulatory minimum levels at 15.4% for banks and 209% for insurers and takaful operators.

“This will enable them to continue supporting households’ and businesses’ financing and protection needs as economic activities resume,” Bank Negara said in a statement.

The central bank released the Financial Stability Review for the first half of 2022 today.

Despite continued heightened volatility in the domestic financial markets, Bank Negara said market conditions have remained orderly with the smooth intermediation of two-way flows in the bond and equity markets.

It noted that the US dollar had strengthened significantly and has remained at a two-decade high due to aggressive policy rate hikes in the US and flight to perceived safe US dollar assets.

Continued onshore foreign exchange market liquidity is enabling orderly adjustments to external developments. This will support businesses and market participants in managing their foreign exchange exposures.

The central bank said the financial performance of businesses continued to improve in line with the full resumption of economic activities and reopening of international borders.

However, recovery remains uneven and has been slower in certain economic sub-sectors. Overall business loan impairments remain low at 1.1% of total banking system loans.

“The share of business loans with higher credit risk has continued to decline to 14.4% of total business loans in line with the gradual improvement in business conditions.

“The share of SME loans under repayment assistance has halved to 13.1% of total SME loans (or 2.3% of total loans from the banking system and development financial institutions). SMEs that have exited repayment assistance programmes have largely been able to resume their loan repayments,” Bank Negara said.

It added that businesses were expected to face continued headwinds, including tightening global financial conditions and exchange rate developments.

However, additional business defaults under simulated severe stress scenarios are expected to remain manageable.

Importantly, various targeted debt management programmes remain in place for SMEs that continue to experience temporary financial challenges.

“The ratio of household debt-to-GDP has reverted closer to pre-pandemic levels at 84.5%. Banks continue to maintain prudent lending standards amid a sustained recovery in household lending. This is helping to preserve healthy loan servicing buffers among households and their ability to manage the impact of higher borrowing and other costs,” Bank Negara said.

The share of household debt under repayment assistance has declined significantly from 18.8% in December 2021 to 2.4% as of June 2022, with a lower share of household debt reported by banks to be of higher credit risk.

Household impairment and delinquency ratios increased marginally but continue to remain low and within expectations at 1.2% and 0.6%, respectively.

Some segments of household borrowers with high leverage and lower financial buffers could come under financial stress from rising living costs and higher repayments on floating rate loans.

Borrowers under an extended period of repayment assistance are also likely to present higher risks. Risks associated with such borrowers are expected to be contained.

The share of household loans classified by banks as exhibiting higher credit risk (Stage 2 loans) has continued to decline to 7.9% (December 2021: 8.5%).

It is expected to decline further over the course of the year as more borrowers that have exited repayment assistance programmes complete a minimum “observation” period of loan servicing.

Bank Negara said banks have set aside sufficient provisioning buffers against these risks. Banks also continue to extend appropriate support to household borrowers who still face financial challenges.

Financial institutions are directing significant resources to maintain strong cyber defences and technology risk controls.

Bank Negara governor Tan Sri Nor Shamsiah said: “We continue to work closely with the industry, key agencies and law enforcement authorities to address emerging threats. Enhancing the financial industry’s capacity to recover from various operational incidents remains our top priority.

“Some of these efforts include simulated live tests to ensure the practical ability of financial institutions and payment system operators to execute cyber incident response plans effectively.”

Meanwhile, financial institutions are required to implement additional countermeasures against online banking fraud.

In parallel, Bank Negara is coordinating efforts with the industry, Royal Malaysia Police, and the Malaysian Communications and Multimedia Commission to further improve fraud incident response and recovery efforts and educate the public on using digital financial services safely.

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