Malaysia Financial System - Resilient

Latest stress tests conducted by Bank Negara Malaysia affirm that the Malaysian financial system is expected to remain resilient under severe macroeconomic and financial strains.

In its financial stability report, it said financial institutions currently maintain excess total capital buffers of RM135.9bil, which exceed regulatory minima, even under adverse scenarios.

"The Bank remains vigilant of domestic and external developments that could affect domestic financial stability, including further tightening in global financial conditions that could lead to higher financial market volatility," it said.

In its report on on the status of the country's financial system in 1H 2018, BNM said despite trade-related tensions, rising interest rates and volatility seen following GE14, domestic financial stability remained intact during the period.

"The Malaysian financial system remained resilient, firmly supported by well-capitalised financial institutions, and deep and liquid financial markets which have facilitated financial intermediation activities," it said.

"Excess liquidity maintained by the banking system currently stands at RM156.2bil."

Meanwhile, banks continued to diversify their funding base to include more stable medium-term debt instruments coupled with existing buffers of high quality liquid assets well above the minimum Liquidity Coverage Ratio (LCR) requirement.

In the household sector, new household borrowing remained high quality with about three-quarters of new loans approved given to borrowers with debt service ratios of less than 60%. 

Cross-cutting measures implemented since 2010 have also put overall household debt accumulation on a more sustained path relative to income growth.

The ratio of household debt-to-GDP continued to moderate and stood at 83.8% in 2Q 2018, as compared to 84.2% in 2017.

A sustained demand for affordable housing is expected to mitigate the risk of a broad-based correction in the property market.

BNM reported that unsold housing units increased to about 146,196 units as the end of 1Q 2018 with more than 80% of unsold units priced above RM250,000. Meanwhile, excess supply of office space and shopping complexes is expected to persist.

The aggregate leverage of non-financial corporations increased at a moderate pace but the firms continue to maintain healthy financial with their debt servicing capacity remaining above prudent thresholds.

While the agriculture and oil and gas sectors could be affected by supply disruptions, most other sectors are expected to perform better on the back of positive consumer and business sentiments, higher retail spending during the tax-holiday period, as well as favourable labour market conditions.

The contagion risk from external exposures and overseas operations of banks are expected to be contained.

"There is little sign of undue reliance on external and cross-currency funding among onshore banks. Onshore banks’ external debt comprised less than 8% of total banking system liabilities, and non-residents accounted for only 4.7% of total banking system deposits," said BNM.

It said the widerning net external liabilities of the banking system in 1H2018 primarily reflected precautionary measures taken by banks to reinforce foreign currency liquidity buffers amid increased global market volatility.

Domestic banking groups continue to expand their regional operations albeit at a more moderate pace, supported by strong capitalisation levels with improved earnings, sound asset quality and stable funding structures.

The financial performance of the banking system in the first half of 2018 was strong with margins improving as banks benefited from continued efficiency gains and improved asset quality.

"Overall total impaired loans (net of individual impairment provisions) contracted by 10% to RM16bil or 1% of total net loans (2017: RM17.8bil or 1.1%). Annual returns on assets and equity were stable at 1.5% and 13.3%."

In insurance and takaful, the sector maintained positive growth of 2.2% underpinned by strong overall capitalisation. 

"New business of life insurers and family takaful operators recorded a higher growth of 7.7% (1H 2017: 6%), largely driven by growth in credit-related insurance and takaful products consistent with the sustained expansion in housing loans."

BNM added that the sector was supported by the motor segment and relatively stronger demand in the medical and health segments.