Friday 29 Mar 2024
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KUALA LUMPUR (May 16): Adoption of the Malaysian Financial Reporting Standard 9 (MFRS 9) — the new accounting standard for financial instruments — is largely credit neutral on Malaysian banks, said Moody’s Investors Service.

Though the new acounting standard will change how the country's banks measure, reserve for, and report credit losses, it does not affect Moody's credit assessment of them "because the underlying economics of bank assets remain unchanged", said Moody's vice president and senior analyst Simon Chen in a statement today.

Some banks have already adopted the standard, which Moody's described as more forward looking with a broadened application, others plan to do so at the start of their respective new financial years.

"We already incorporate forward-looking information into our assessment of a bank's creditworthiness. That said, MFRS 9 represents a strengthening in credit practices because of its more proactive stance on requiring higher provisions on underperforming assets and the incentive it gives to the banks to undertake better credit monitoring practices to pre-empt unwarranted credit migration,” said Chen.

Moody's said MFRS 9, which took effect on Jan 1, introduces the concept of expected credit losses (ECLs) as the basis for provisioning on all financial asset holdings, which is broadly similar to IFRS 9.

The key recurring impact of MFRS 9, according to Moody's, is that provisioning expenses will be more sensitive to the origination of new credit assets and credit migration drivers, such as changes in macroeconomic conditions and loan surveillance practices.

"Because we expect credit conditions in the Malaysian banking system to remain benign over the next 12-18 months, provisioning expenses under MFRS 9 will have only a limited effect on subsequent period earnings among Malaysian banks," Chen added.

While the new accounting standard will affect capital ratios because the application of ECL on a broader coverage of financial assets will result in loss allowances that are in most cases larger than banks' reserves under FRS 139, Moody's said the Day 1 adjustment to Common Equity Tier 1 (CET1) ratios will be manageable for the banks.

"Initial estimates from the six banks that Moody's rates in Malaysia indicate a 0-80 basis point decline in CET1 ratios on Day 1 of MFRS 9 adoption. However, some banks have indicated that the fair value treatment of non-loan financial assets under MFRS 9 could result in valuation gains and partly offset higher loss allowances," it added.

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