Economic Report 2014/2015: Banking system remains well capitalised

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THE BANKING SYSTEM remained well capitalised under the Basel III capital adequacy framework, with the CET1 capital ratio standing at 12.4%, tier 1 capital ratio at 13.2% and total capital ratio at 15.1% as at end-July, according to the Economic Report 2014/2015.

Liquidity remained ample, with banks maintaining strong liquidity buffers and large placements of more than RM124 billion with Bank Negara Malaysia to meet liquidity demands. The banking system also recorded a projected liquidity surplus of 14.9% of total deposits for liquidity needs maturing within one week.

In the first seven months of the year, the banking system’s pre-tax profit increased 16.1% to RM18.9 billion, contributed mainly by revenue from financing activities and fee-based services. Foreign banks continued to have a significant presence in the banking sector’s assets.

The banking system grew moderately over the first seven months as total loans outstanding expanded 8.6% to RM1.27 trillion at end-July, compared with the 10.6% growth to RM1.22 billion in the first seven months of 2013.

During the first seven months of 2014, loan disbursements grew 13% to RM601.2 billion compared with a contraction of 3.3% to RM531.9 billion in the previous corresponding period. Meanwhile, loan applications declined 1.9% to RM462.7 billion versus a contraction of 1.8% to RM471.9 billion last year. Loan approvals dropped 2.4% to RM222.5 million from RM227.9 billion.

Lending to businesses moderated, with business loan approvals declining 8.4% to RM82.5 billion. The decrease is smaller compared with the 23.2% drop to RM90.1 billion in the previous corresponding period. Loan applications increased 2.5% to RM210.7 billion. Overall, loans outstanding to the business sector increased 6.8% to RM467.6 billion.

Financing for small and medium enterprises (SMEs) also moderated, with applications and approvals declining 5.3% and 12.6% to RM105.2 billion and RM37 billion respectively.

Most of the SME loans were to the finance, insurance and business services sectors, followed by the wholesale and retail trade, restaurants and hotels sectors. Total SME loans outstanding rose 11.3% to RM212.7 billion and accounted for 45.5% of total business loans outstanding.

Total household loans outstanding accounted for 57.6% of the total loans outstanding in the banking system, growing 11.1% to RM732.9 billion, as at end-July.

From January to July, loan applications in the household sector eased 5.4% to RM252.1 billion, while loan approvals and disbursements continued to grow 1.6% and 3% to RM140.1 billion and RM176.6 billion respectively.  Total household debt increased 9.9%, the slowest pace since 2010, to RM904.3 billion, and accounted for 86.7% of nominal gross domestic product as at end-June.

“The risks to domestic financial stability remained well-contained, supported by more than sufficient financial assets of households, a stable labour market and steady income growth,” says the report.Household financial assets continued to grow 8.1% to almost RM2 trillion as at end-July. During the same period, household financial assets accounted for more than twice the household debt.

As at end-July, the net impaired household loans ratio improved slightly to 1.2% of total household loans in the banking system, compared with 1.3% in the previous corresponding period.  The impaired loans ratio of credit cards improved slightly to 1.2%, compared with 1.3% at the same time last year.

The insurance industry maintained its strong capitalisation and higher profits. The capital adequacy ratio for the industry was higher at 250.4%, supported by stable reserves.

The profitability of the life insurance sector improved to RM8.2 billion, supported by net capital gains and higher net premium income. The market penetration rate of the life insurance sector improved to 41.2% as at end-July, from 41% during the same corresponding period last year.

The operating profit for the general insurance industry stood at RM1.3 billion. Gross direct premiums rose 5.3% due to an increase in the fire and motor businesses.

Insurance fund assets continued to expand 7.9% to RM215.3 billion. Assets of the life insurance sector continued to account for the major share (86.6%) of the industry’s total assets, while the composition of general insurers’ asset holdings portfolio remained mostly unchanged.

This article first appeared in The Edge Malaysia Weekly, on October 13 - 19, 2014.