KUALA LUMPUR, April 5 — Malaysian banks are resilient to potential shocks and tail risks, and have sufficient earnings as well as capital buffers to absorb potential losses, said Moody’s Investors Service.
Its Vice President-Senior Analyst Simon Chen said the results of Bank Negara Malaysia’s (BNM) solvency stress test showed the banks had resilient capital and earnings buffers in severe macroeconomic and financial stress, which was credit positive.
BNM’s stress test used three hypothetical domestic gross domestic product (GDP) rates, namely a baseline scenario and two adverse scenarios. Under the scenarios, simultaneous shocks to revenue, funding, credit and market risks were applied to banks’ earnings, balance sheets and capital levels over four years to 2021.
Under the baseline scenario, the local banks’ system-wide total capital adequacy ratio would fall by about 50 basis points over the period, Chen noted in a sector commentary in Moody’s Credit Outlook report titled “Malaysian Banks’ Latest Stress Test Results Are Credit Positive”.
The first adverse scenario assumed a strong V-shaped recovery to the baseline growth rate from a sharp recession in 2018, while the second adverse scenario simulated an L-shaped trajectory with the growth rate staying low after a mild initial drop.
The ratio would drop about 150 basis points in the first adverse scenario and about 200 basis points in the second adverse scenario.
“Still, under both adverse scenarios, the system-wide total capital ratio would remain above a regulatory minimum of 10.5 per cent, including a capital conservation buffer of 2.5 per cent, at the end of 2021,” Chen said.
The results of the stress test were recently published in BNM’s annual Financial Stability and Payment Systems Report for 2017.
According to the central bank, more than 90 per cent of capital losses under the stress test scenarios would result from credit losses.
In the adverse scenarios, the system-wide gross impaired loan ratio would jump to 5.0 per cent in the first scenario and 9.0 per cent in the second scenario from 1.5 per cent at end-2017, and loss-given defaults would rise as high as 80 per cent.
Losses from household loans would account for 34 to 38 per cent of total capital losses, while about 60 per cent of the capital erosion caused by credit losses would derive from corporate loans.
The latest BNM data also showed continued moderation in leverage among households and corporations in Malaysia, mainly driven by a slowdown in debt accumulation. — Bernama
