KUALA LUMPUR: Under simulated scenarios of severe portfolio outflows over a short duration, the banking system and insurance industry are expected to continue to record lower profits, said Bank Negara Malaysia (BNM).

The central bank said this assessment takes into account market-to-market losses from holdings of equities, interest rate risks in the trading book, foreign currency exposures and credit losses from businesses affected by significant exchange rate volatility.

Nonetheless, banks’ capital levels are estimated to remain above 10% while insurers’ capital adequacy ratio is expected to remain above 130%.

“Banks are expected to maintain sound funding strategies going forward including ensuring a high composition of stable funding sources,” it added.

Further adjustments in the deposit and interbank rates are expected as banks react to additional details provided by the central bank on the operationalisation of the liquidity coverage ratio (LCR) rules.

“Barring any shocks, the expectation is for interbank rates to stabilise,” it said.

BNM also noted that falling oil prices particularly towards the end of 2014 and in the early part of 2015 added to investor concerns over the potential impact on the domestic economy.

The ringgit depreciated by 6.1% for the year and by 3.6% in December, to end 2014 at 3.4950 per US dollar.

The market capitalisation of the FTSE Bursa Malaysia contracted by 2.9%, while the FBM KLCI closed lower for the year at 1,761.3 points.

Nonetheless, BNM said the presence of strong financial institutions and a large pool of domestic institutional investors continued to provide the necessary liquidity and demand in the domestic financial markets.

Overall liquidity in the banking system remained ample, with aggregate surplus liquidity amounting to RM269.9 billion. The loan-to-deposit ratio rose to 86.7% last year from 84.7% in 2013.

This article first appeared in The Edge Financial Daily, on March 12, 2015.