KUALA LUMPUR (Mar 11): The Malaysian banking and insurance industries are expected to record lower profit if the severe portfolio outflow persists in the short term, said Bank Negara Malaysia.

 The central bank said in its latest financial stability and payment systems report that its finding was based on simulated scenarios of severe portfolio outflows over a short duration.

"This assessment has incorporated a range of extreme shock parameters, including mark-to-market losses from holdings of equities, interest rate risk in the trading book, FCY (foreign currency) exposures and credit losses from businesses affected by significant exchange rate volatility.

According to the central bank, the country's aggregate net portfolio outflow for 2014 amounted to RM37.9 billion, a significant increase from net outflows of RM3 billion in 2013.

"The domestic financial markets experienced several episodes of heightened movements in short-term portfolio flows throughout the year. Developments, mostly on the external front, weighed heavily on investor sentiment and risk appetite with portfolio investors retreating from emerging markets," Bank Negara said.

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

The regulator said this had contained market volatility. "Overall, movements in short-term portfolio funds and falling oil prices did not have a destabilising impact on the domestic financial markets," Bank Negara said.

"The banks’ capital levels are estimated to remain above 10% while insurers’ Capital Adequacy Ratio (CAR) is expected to remain above 130%," Bank Negara said.

Bank Negara acknowledged that falling crude oil prices particularly towards the end of last year and in the early part of 2015 added to investors' concerns over the potential impact on the domestic economy.

In 2014, the ringgit depreciated by 6.1% against the US dollar to end the year at 3.4950.  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.

Bank Negara said Malaysian Government Securities yields rose between 0.2 basis point and 45.4 bps across the one-year to 10-year bonds during the year as investors exited these instruments.