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KUALA LUMPUR: Bank Negara Malaysia’s stress test has confirmed banks’ resilience to an expected increase in credit losses under more adverse economic conditions despite forecasts of further deterioration.
Under the presumed scenario of economic and financial shocks arising from the pandemic, overall impairments are projected to rise above 4% of loans by the end of 2021, primarily driven by higher trade impairments.
In its “Financial Stability Review – First Half 2020” report issued on Wednesday, it said that this takes into account the effects of the general moratorium implemented in April and subsequent targeted payment assistance for individuals that was announced by banks in August.
Business impairments are expected to be driven by defaults on maturity repayments of companies operating in vulnerable sectors, mainly in the service industry, which is expected to experience a slower recovery, as well as exposures to various large groups of borrowers with weaker finances.
Meanwhile, the deterioration in household loans is projected to double, albeit from historically low levels.
Major disabilities are expected to emerge in the home in the second half of 2021 given the extended payment assistance programs that will remain in effect until 1Q 2021 for people who have experienced a loss of income.
“Overall, borrowing costs for banks could rise to RM29 billion (1.4% of total loans) during 2020 and 2021. These projections assume conservative estimates of the proportion of loans under targeted repayment assistance. (mainly for companies) based on restructuring and rescheduling (R&R) trends observed at the start of the pandemic.
“With the persistence of uncertain conditions, banks have been much more proactive in extending payment assistance, as seen in recent months. This was not taken into account in the simulations, ”he said.
Bank Negara said that since July, the number of businesses receiving payment assistance from banks has increased sevenfold. This would improve debt service capacity and mitigate credit losses.
He also noted that, in anticipation of higher credit losses, banks have been propping up their buffers, adding RM2.7 billion to provisions in the first half of 2020.
“At the individual bank level, additional provisions by banks have already increased to an average of 16% of the banks’ projected stress credit losses over a 12-month horizon based on their internal stress tests.
“Provisions could rise further as banks gain greater visibility into credit developments based on more informed borrower assessments after the end of the blanket moratorium.
“The gradual build-up of provisions will also ensure that banks maintain healthy buffers to absorb losses and support continued lending to the economy,” he said.
The impact of stressed credit losses on bank solvency would cause the aggregate total capital ratio (TCR) and the CET1 capital ratio to decline by two percentage points (ppts) and 1.4 ppts, respectively, over the next 12 -18 months.
Based on the bottom-up scenario analysis, the aggregate TCR and CET1 capital ratio as reported by commercial and Islamic banks is projected to decline to a greater degree of 3.4 ppts and 3.1 ppts, respectively, from initial positions.
Bank Negara said that by applying a sensitivity analysis to these results, individual banks are projected to have adequate buffers above the regulatory minimum capital requirement to withstand additional losses associated with default rates that are eight times higher than historical rates. bank default.
These multiples are significantly more severe than Malaysia’s worst historical experience in the Asian financial crisis, during which overall deteriorations increased three to five times from initial levels.
It was observed that the drivers of credit losses were very similar in both the macro simulation and the bottom-up analysis, which further affirms that the financial system has adequate buffers to withstand extreme stresses that are more severe than the worst historically experienced to date. .
Bank Negara said that while the stress tests capture plausibly adverse scenarios with some degree of conservatism, the actual impact of the pandemic on bank solvency over the next 12 to 18 months will depend on multiple factors.
They include the pace and strength of the national economic recovery, which in turn depends on how the pandemic continues to evolve, labor market conditions, and the behavior of businesses and consumers in the new normal.
Other factors include the pace of economic recovery within the region, which could affect the quality of assets and profitability of foreign operations of domestic banking groups;
Initiatives taken by financial institutions to support viable borrowers, which could improve debt service capacity and reduce potential impairments;
Bank management actions to shore up buffers such as new capital issues or capital injections from parent banks; Y
Additional policy intervention by Bank Negara, the government and / or other authorities to support the economic recovery.
Bank Negara said that while banks can be expected to be more cautious given continued uncertainties and prospects for a longer recovery, it is in the collective interest of the banking industry to continue supporting viable businesses and homes during this period.
“The capital buffers built up over the years are intended to back up loans in times of stress and can therefore be used. Additionally, these mattresses are vital for banks to remain resilient and reduce risk aversion.
“This will be critical to avoid further repercussions on economic growth and the prospects for recovery, which in turn will inflict much greater losses on banks,” he said.
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