BNM Annual Report 2019: Financial institutions remain profitable and well-capitalised

BNM Annual Report 2019: Financial institutions remain profitable and well-capitalised
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KUALA LUMPUR (April 3): Bank Negara Malaysia (BNM) said today banks, insurers and takaful operators in the country remained profitable in 2019 despite the more challenging operating environment.

Prudent risk-taking has cushioned the impact of cuts in the overnight policy rate since May 2019 on bank margins, with higher non-interest income, sustained lending activity, and lower debt-servicing burdens of borrowers continuing to lend support to profitability, according to the Central Bank.

BNM said in its Financial Stability Review for Second Half 2019 that in the insurance and takaful sectors, overall performance has been supported by sustained business growth as ongoing reforms continued to contribute to improvements in pricing and persistency.

Sustaining the momentum of insurance reforms, including in the motor insurance sector, will remain critical to preserve affordable access to insurance and takaful protection, BNM said.

"The continuing profitability of financial institutions is crucial to the essential roles that they play in the economy. Sustained profits have continued to underpin the strong capitalisation of financial institutions and a sound financial system in Malaysia.

"Capital buffers held by banks, insurers and takaful operators remain high. Along with the implementation of enhanced capital adequacy, liquidity and risk management standards for financial institutions, this has strengthened the overall resilience of the financial system.

"While the impact of COVID-19 on the economy is expected to be significant in the short-term, banks are entering this period from a position of strength.

"Updated stress tests conducted by the Bank (BNM) continue to affirm that financial institutions remain resilient under severe market, credit, and funding and liquidity shocks.

"Further supporting this resilience is an increased supervisory emphasis by BNM on strengthening financial institutions’ response and recovery capabilities in the event of financial difficulty or operational disruptions.

"This underscores the ability of the financial system to support economic activity under varying economic and financial conditions,” BNM said.

Looking ahead, BNM said a prolonged and severe impact from the COVID-19 pandemic remains a key downside risk to the economy and financial stability.

A significant weakening of economic conditions could increase household, business and financial market stress, and test the resilience of the financial system, it said.

BNM said the financial system is on a strong footing to withstand such stress. Nevertheless, the Financial Stability Committee will continue to closely monitor developments to ensure continued support for the credit intermediation and risk protection needs of households and businesses, it said.

"For 2020, banks are expecting weaker credit growth compared to 2019. This remains significantly dependent on the duration of the COVID-19 pandemic.

"While the impact of COVID-19 on the economy is likely to be significant in the short-term, banks are entering this period from a position of strength, with significant capital and liquidity buffers.

"The prudent management of credit risks and diversified income sources will provide support to profitability.

"In addition, banks’ digitalisation strategies are expected to drive further operational efficiencies, lending additional support to long-term profitability and overall viability.

“In the wake of the COVID-19 pandemic, banks are expecting an increase in the share of restructured and rescheduled loans, particularly by borrowers in the business segments that have been most affected by the pandemic. This is likely to increase provisions over the short-term.

"In response to the COVID-19 pandemic, BNM also announced a series of regulatory measures in support of banks’ efforts to assist affected households and businesses.

"Banks have been allowed to draw down on capital and liquidity buffers, to support lending activities. These buffers, which have been built up over the years, along with liquidity management by BNM, have placed banks in a strong position to support the economy during these challenging times.

"The sustained profitability of banks, underpinned by sound underwriting and risk management practices, will also help banks gradually restore their buffers once the flexibilities are lifted,” BNM said.

For more stories on BNM's annual report, click here.