KUALA LUMPUR (Sept 29): Malaysia’s banking system total deposit annual growth slowed to 3.9% in June 2021 from 6% in March 2021, but remained supported by precautionary savings by households and businesses, Bank Negara Malaysia (BNM) said.

Deposits from non-bank financial institutions (NBFIs) moderated slightly, reflecting withdrawals by these institutions, partly to facilitate the implementation of government relief measures, the central bank said in its Financial Stability Review report for the first half of 2021 (1H21) released on Wednesday.

Additionally, non-residents continued on withdrawal mode for the seventh consecutive month since December 2020, albeit at a slower pace.

Meanwhile, sustained preference for more liquid assets among Malaysian households, businesses and fund managers amid the uncertain operating environment currently has led to lower funding costs and consequently improved net interest income for banks.

The percentage of current and savings accounts over total deposits across the local banking system rose to 35.9% in June 2021 from 32.4% a year ago, while fixed deposits fell to 29.5%, from 31.7%, the report showed.

Consequently, the average cost of deposits came in at 1.34% in June 2021 from 1.57% in December 2020, while average cost of funds fell to 1.46%, from 1.66% in the same period.

The banking sector’s net interest margins improved to 2.1%, from 1.9% in December 2020, due to lower funding costs and higher loan growth particularly in the household segment.

Also supporting interest income was banks’ holdings of government bonds, which rose RM22 billion in 1H21.

“This partially offset a marked decline in net trading income amid rising bond yields, after significant gains recorded in 2020,” it said.

Moving forward, BNM said overall funding conditions are expected to remain supportive of intermediation activity.

Amid potentially higher deposit withdrawals and higher take-up of repayment assistance, the report said banks’ liquidity positions are expected to remain resilient to these pressures.

“At the institution level, the shift towards shorter-term funding has led to larger movements in the Liquidity Coverage Ratio (LCR) positions for some banks. However, this is unlikely to have a material impact on liquidity risks given ample liquidity buffers maintained by banks,” BNM said.

“All banks continue to record LCR above 100%, with increased holdings of high-quality liquid assets (HQLA),” it added.

Based on a conservative simulation exercise conducted by the central bank — which incorporates the simultaneous materialisation of these downside risks, coupled with the drawdown of unutilised credit lines by businesses — banks’ liquidity positions remained resilient.