This article first appeared in The Edge Financial Daily on February 10, 2020

KUALA LUMPUR: The issuance of Bank Negara Malaysia’s (BNM) domestic systemically important banks (D-SIBs) framework last week is not expected to significantly impact the Malaysian banking industry, according to banking sector analysts.

This is because Malaysian banks are already adequately capitalised and are above the Basel III capital requirements.

While this capital build-up could be drained in the event of higher loan defaults triggered by weak economic growth — or worse still, an economic recession — analysts say it is unlikely at this juncture, as the banking sector’s overall asset quality has improved.

“There has been [an increase in] asset quality towards the end of last year, where we saw an improvement [in] gross impaired loan ratio, which came down to 1.5% in December from 1.6% in November, while total provisions for the sector have declined by RM1.1 billion or 4.4% month-on-month.

“With the D-SIB framework, the minimum capital requirement for the country’s three largest banks has been increased. However, our banks have always been well capitalised. Even before the framework [was announced], their capital ratios were already in compliance with the [new] requirements,” AmInvestment Bank analyst Kelvin Ong told The Edge Financial Daily.

D-SIBs refer to banks whose distress or failure has the potential to cause considerable disruption to the domestic financial system and the wider economy. Hence, D-SIBs are required to maintain higher capital buffers to meet regulatory capital requirements, which include a higher loss absorbency (HLA) requirement.

In the D-SIB framework released last Wednesday, BNM identified the country’s three largest banking groups — Malayan Banking Bhd (Maybank), CIMB Group Holdings Bhd and Public Bank Bhd — as D-SIBs.

The applicable HLA requirement for these D-SIBs is 1% of risk-weighted assets for Maybank and CIMB, and 0.5% for Public Bank.

BNM expects the designated D-SIBs to be able to meet the additional capital buffer requirement, which comes into effect on Jan 31, 2021, without having to raise additional capital, and that it will have minimal impact on their business activities.

“From what we observe, the capital ratios of these three banks are already in compliance with requirements, and there is no need for them to raise any additional capital,” MIDF Research analyst Imran Yassin Yusof told The Edge Financial Daily.

In last Friday’s report, Maybank IB Research said Basel III calls for a minimum common equity and conservation buffer of 7%, and that countries are supposed to add on a countercyclical buffer (CCB) and a D-SIB buffer, to be set by the individual central banks.

“The CCB is a buffer against cyclical systemic risks and ranges from 0% to 2.5%, [and] BNM has currently set the CCB at 0%,” Maybank IB noted.

Assuming a maximum CCB of 2.5%, the research firm said Maybank and CIMB would have to set aside a minimum common equity tier 1 (CET1) capital ratio of 10.5%. This would comprise the minimum 7% requirement for the CET1 and conservation buffer, 2.5% for CCB and 1% for D-SIBs.

As at Sept 30, 2019, Maybank had a CET1 ratio of 14.4%, while CIMB’s CET1 ratio stood at 13.1% — both well above the required ratio of 10.5%. Public Bank also had a CET1 ratio of 13.1% as at end-September last year.

RHB Bank Bhd, while not in the inaugural D-SIB list, had the highest CET1 ratio in the industry. As at Sept 30 last year, it had a CET1 ratio of 16.5%.

With greater clarity on capital requirements and with Malaysian banks having met the minimum levels, there is a possibility some may raise their dividend payout, said Maybank IB.

“This, in our view, would depend on what banks have set as their internal capital targets. With the highest CET1 ratio in the industry, RHB has room to raise its payout over time, in our view.”