KUALA LUMPUR (March 27): While the banking sector's profitability remained healthy, the sector saw slower profit growth in 2018 which resulted in lower annual returns on assets and equity of 1.4% and 12.6% respectively.

Bank Negara Malaysia (BNM), in its Financial Stability and Payment Systems Report 2018, attributed the slower profit growth to higher provisions set aside by banks with the implementation of Malaysian Financial Reporting Standards (MFRS 9) and an increase in interest expenses on deposits, in line with the overnight policy rate (OPR) hike in January last year.

The impact from provisions was, however, cushioned by the regulatory reserves that banks have been required to maintain since 2010, according to BNM.

Financing margin (net of impairment provisions and operating costs) edged marginally higher, with a majority of banks reporting lower costs of operations, said BNM, adding that the trading and investment income grew for the year supported by favourable financial market conditions in the earlier part of the year.

Also, while the newly implemented MFRS 9 had resulted in lower capital ratios compared with the levels in 2016 and 2017, BNM said banks have continued to maintain sizeable excess capital buffers above the regulatory minimum.

“The bulk of bank capital (about three-quarters) is held in high quality loss-absorbing instruments comprising paid-up ordinary share capital, retained earnings and reserves,” said BNM.