KUALA LUMPUR: With the adoption of the new International Reporting Standard 9 (IFRS 9) next year -- or MFRS 9 as the Malaysian equivalent is known -- the amounts banks have to set aside for expected loan liabilities or provisions could jump as high as 50%, which could hurt earnings, weigh on capital ratios and potentially affect dividend payout, experts say.

This may also result in loans getting more expensive for borrowers, wrote The Edge Malaysia assistant editor Adeline Paul Raj in the publication's cover story 'Banks brace for MFRS 9 Impact' for the week of Sept 11-Sept 17.

As banks deal with the higher provisioning, they may reprice or restructure loans -- making it more expensive for borrowers with riskier credit profiles, according to Elaine Ng Yee Ling, a partner and leading expert on MFRS 9 at PwC.

She also said for every bank, the extent of the impact will be different. "Even if the increase in provisions comes in at the higher end of the 20% to 50% range, Malaysian banks are quite well capitalised, so it’s not going to be an immediate concern. The only thing here is the impact on profitability subsequently. That’s the main concern," she told the weekly.

The estimated 20%-50% range in provision increase on the first day of MFRS 9 adoption (known as Day One impact), suggests that the jump for Malaysian banks may be higher than their Europe counterparts. The majority of banks there expect provisions to go up by as much as 18% after IFRS 9 is introduced, according to the European Banking Authority two months ago. 

Under the new accounting standard, banks will be required to switch to an expected loss model, as opposed to the incurred loss model that is used now under the current accounting standard or MFRS 139.

Essentially, this means banks will have to make provisions in anticipation of future losses, rather than the current practice of making provisions only when loans have been classified as impaired. 

Hence, for a performing loan, banks will have to make provisions on the basis of projected losses over 12 months. If there are signs that the loan's credit quality is weakening, then losses will have to be booked over the loan's entire lifetime.

All six banks that The Edge spoke to -- Maybank, CIMB Group HOldings Bhd, Hong Leong Bank Bhd, RHB Bank Bhd, AMMB Holdings Bhd and Affin Holdings Bhd -- said they are on track with their respective plans for MFRS 9 adoption.

While Affin, the country's second smallest bank, revealed that dividends are likely to be marginally lower post-MFRS 9, AMMB group CEO Datuk Sulaiman Mohd Tahir reckoned banks may offer shorter tenure loans going forward, as a measure to manage and reduce lifetime expected credit losses.

Though most of the six banks acknowledged that annual provisions will rise, none indicated to what extent their annual earnings would be impacted. Instead, they only said the impact on their CET-1 capital on Day 1 will be manageable.

Industry observers, meanwhile, say unsecured loans such as personal financing and credit cards, which are high-risk, high-margin products, may also be a grey area for banks. 

"Banks will also have to carry provisions for credit card limits, and thus may consider reducing the limit for some customers," the weekly wrote.

Meanwhile, the clock is ticking and with less than four months to go, Malaysian banks are scrambling to get ready for the accounting overhaul. 

It should also be noted that it is not just banks that will be affected by MFRS 9, wrote The Edge senior writer Supriya Surendran in a related story, 'New standard's effect not limited to banks'. Pension funds like The Employees Provident Fund (EPF) and corporations that adhere to the MFRS and IFRS are expected to see an impact too with the migration to the new standard, though it is unlikely to be as significant as it will be for banks. 

To learn more about what MFRS 9, what else local banks' chiefs have to say, who else will be impacted, and what Bank Negara Malaysia shared with The Edge on the issue, get a copy of The Edge at newsstands near you today, or save by subscribing to us for your print and/or digital copy. 

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