KUALA LUMPUR (March 30): Bank Negara Malaysia (BNM) said its updated stress test continued to affirm the resilience of capital buffers of banks to withstand potential losses under severe macroeconomic and financial shocks, while sustaining support for an economic recovery.

Stress test losses to the banking system remain mainly driven by credit risk, the central bank said in its Financial Stability Review for the second half of 2021.

Under the stress test performed by BNM, two adverse but plausible scenarios are adopted to assess the resilience of banks in the event the current economic recovery stalls.

Under the second scenario — which assumes a sluggish and L-shaped recovery in 2023 after negative growth in 2022 and 2023 — projected cumulative credit costs over the three-year horizon amounting to RM41.7 billion or 2% of total loans.

“Aggregate banking system profits could decline by more than a third, driven by higher credit costs and lower net interest income as funding costs rise due to sovereign rating downgrades.

“The projected rise in yields also results in significant (RM13.3 billion) revaluation losses incurred on bond holdings in the banking books. Losses from overseas operations, while significant for large domestic groups, do not pose major threats to overall resilience given adequate localised capital buffers maintained at their overseas entities,” said the report.

The central bank said the banking system’s capital ratios remain comfortably above the regulatory minima.

“Almost all banks maintain capital ratios above their internal capital targets, although up to 25 banks (out of 53 banks) are projected to record annual losses during the stress test horizon. Only two banks (accounting for 0.5% of total banking system assets) are projected to breach the minimum regulatory capital requirement under these adverse scenarios. 

“Overall, the stress test results affirm that banks can withstand severe macroeconomic and financial shocks and remain well positioned to support lending to businesses and households as the economy recovers,” said the report.

The report also noted that banks’ intermediation activities continued to be funded by stable funding sources. The aggregate net stable funding ratio (NSFR) stood at 116.2% as of December 2021, with all banks already meeting the minimum NSFR requirement of 100%. 

“Total deposits increased at a faster pace (December 2021: 6.3%; June 2021: 3.9%) driven by a recovery in business deposits with the reopening of the economy. 

“After recording a strong growth in 2020 due largely to the blanket loan repayment moratoria, growth in household deposits has since normalised closer to pre-pandemic levels (December 2021: 4.9%; June 2021: 4.3; 2015-2019 compound annual growth rate: 5.1%),” said the central bank.

BNM said the continuation of support measures for affected businesses and households had had limited impact on banks’ liquidity positions.

“Banks maintained healthy liquidity buffers to withstand potential stress events. The aggregate liquidity coverage ratio (LCR) remained well above the regulatory minimum. 

“The higher LCR also reflected excess deposits being channelled into high-quality liquid assets, such as central bank placements and government bonds, amid higher Malaysian Government Security issuances in 2021 as growth in deposits outpaced that of loans (annual growth in loans [December 2021]: 4.5%; June 2021: 3.4%),” the report said.

Looking ahead into 2022, BNM said banks are expected to face tightening in funding conditions as monetary policy normalisation in advanced economies could lead to outflows from emerging market economics, including Malaysia.

It added, however, that the impact of this on banks is expected to remain manageable owing to their strong liquidity and funding positions, assuring their ability to continue supporting households and businesses.

Read more stories from the BNM Annual Report 2021 here.