KUALA LUMPUR, March 31 — Banks continued to maintain strong capitalisation levels throughout the second half (H2) of 2020 despite recording lower profits during the period, with aggregate excess capital buffers amounting to RM126.7 billion.
The total capital ratio (as a percentage of risk-weighted assets) stood at 18.5 per cent as at December 2020 compared with an average of 17.9 per cent in 2019, Bank Negara Malaysia (BNM) said.
“Banks have sought to preserve their buffers in anticipation of higher credit losses going into 2021, by lowering dividends to shareholders, implementing dividend reinvestment programmes, and raising new equity,” it said in the Financial Stability Review for Second Half 2020 report released today.
BNM said the stable capital buffers of banks have been maintained, as the ratio of risk-weighted assets to total assets returned to pre-Covid-19 levels in December 2020 at 57.4 per cent (March 2020: 56.5 per cent; December 2019: 57.5 per cent), indicating that banks continued to support credit flows to the economy.
On liquidity positions, it said the banking system’s liquidity conditions remained supportive of financial intermediation activities in H2 2020 amid sustained growth in deposits and improvement in loan repayments.
According to the report, banking institutions’ placements with the central bank also increased significantly (up RM14.7 billion) as some banks shored up cash buffers in anticipation of potential withdrawals by the government and/or non-bank financial institutions to support various relief measures.
BNM said the banks’ operations continued to be supported by stable funding sources, with the aggregate net stable funding ratio at 116 per cent.
“Growth in banking system deposits remained firm, above the five-year compounded annual growth rate (CAGR) of four per cent, as households and businesses continued to hold precautionary cash buffers amid the challenging operating environment,” it added.
Meanwhile, the impact of the pandemic on bank impairment levels remained largely contained in H2 2020 due to repayment assistance programmes offered by banks to help household and business borrowers manage temporary cashflow constraints.
“Gross impairment ratio of the banking system edged slightly higher to 1.6 per cent (June 2020: 1.4 per cent; 2019 average: 1.5 per cent) following the end of the blanket automatic moratorium, mainly driven by a slight increase in household impairments.
“However, with uncertainty around the ongoing pandemic and uneven economic recovery, the credit risk outlook remains challenging,” it said.
In line with weaker bank earnings throughout 2020, returns on equity and assets of the banking system fell to 9.2 per cent and 1.1 per cent, respectively (June 2020: 10 per cent and 1.2 per cent, respectively).
“While downside pressure on earnings is likely to persist in the first half of 2021, the impact is expected to be less severe than that experienced in 2020.
“Credit costs are expected to begin normalising in the second half of 2021 following banks’ pre-emptive provisioning in 2020,” said the report. — Bernama
