Kuala Lumpur (April 5): The banking industry’s demonstration of resilient capital and earnings buffers in severe macroeconomic and financial stress ­is “credit positive” for the sector, Moody’s Investors Service said of the latest solvency stress test conducted by the central bank.

Commenting on the results of the solvency test included in Bank Negara Malaysia’s Financial Stability and Payment Systems Report for 2017, the ratings agency observed the banks’ systemwide total capital adequacy ratio (CAR) was able to withstand both the baseline and adverse scenario tests, remaining above a regulatory minimum of 10.5% (including a capital conservation buffer of 2.5%) at the end of 2021.

Under the baseline scenario, the total CAR would decline by about 50 basis points over the four-year period, while the ratio would drop about 150 bp in the first adverse scenario and about 200 bp in the second adverse scenario.

“This shows that banks are resilient to potential shocks and tail risks, and have sufficient earnings and capital buffers to absorb potential losses,” Moody’s said in a statement today.

The BNM report indicated more than 90% of capital losses under the stress test scenarios would result from credit losses. In the adverse scenarios, the systemwide gross impaired loan ratio would jump from 1.5% at the end of 2017 to 5% in the first scenario and 9% in the second.

Loss-given defaults would rise as high as 80%. Losses from household loans would account for 34%-38% of total capital losses while around 60% of the capital erosion caused by credit losses would derive from corporate loans.

BNM’s stress test had used three hypothetical domestic GDP rates with simultaneous shocks to revenue, funding, credit and market risks applied to banks’ earnings, balance sheets and capital levels, over the four years to 2021. The first adverse scenario assumed a strong, V-shaped recovery to the baseline growth rate from a sharp recession in 2018 while the second situation simulated an L-shaped trajectory with the growth rate remaining low after a mild initial decline.

Moody’s also observed BNM’s latest data shows a continued moderation in leverage among households and corporations, driven primarily by a slowdown in debt accumulation. “The latest data suggest asset quality risks from household and corporate leverage are well contained, a credit positive for banks.”

Among the positives were a weakening of household debt growth to 4.9% in 2017 from 5.4% in 2016, owing to a decline in higher-risk consumer loans such as personal and auto loans, as well as mortgates on non-residential properties.

Over the same period, overall household debt as a percentage of GDP also reduced to 84% from 88%, while banks’ exposure to the highest-risk households, such as low-income households, fell to 17% of total household loans from 19%. Growth in aggregate non-financial corporate debt slowed to 3% from 9%, with total corporate debt as a percentage of GDP declining to 103% from 110%.