Malaysia’s domestic financial stability preserved

Bank Negara Malaysia (BNM) released the Financial Stability Review for the first half of 2021 today.

Financial sector remained resilient

Domestic financial stability continues to be firmly supported by a resilient financial sector. The ramp up of provisions in 2020 has provided banks with some headroom this year to moderate the amount of additional provisions set aside for credit losses. This enabled banks to further extend debt repayment assistance to households and businesses that were affected by the most recent movement restrictions, while sustaining lending activities. Liquidity and funding conditions in the banking system remained supportive of financial intermediation activities. The banking system total capital ratio was sustained at 18.4%. Similarly, insurers and takaful operators remain well-placed to sustain assistance to individuals and businesses by providing flexibilities for premium and contribution payments that would preserve their protection coverage. The aggregate industry capital adequacy ratio stood above the regulatory minimum at 221%. In the domestic financial markets, conditions have remained orderly and supportive of overall funding conditions for banks and corporates.

Business sector staging a welcome recovery

Governor Datuk Nor Shamsiah said, “Business sector performance began to recover heading into the second quarter of 2021 amid the easing of movement restrictions. The share of firms-at-risk has declined from earlier peaks seen in 2020, although it remains higher than the average pre-pandemic levels due to continued challenges faced by firms in sectors that have been harder hit by movement restrictions.”

Overall business leverage has also improved in line with higher debt repayments by firms. The re-imposition of stricter nationwide containment measures towards the end of the second quarter of 2021 could, however, see some of these financial improvements set back, particularly among smaller firms in the construction and services sectors, while prolonging difficulties that were already challenging firms in the tourism-related industries. This could lead to a renewed pressure on the debt-servicing capacity of more affected firms. Repayment assistance programmes, as well as support measures from the Government and BNM have so far contained any material increase of loan defaults. These support measures have also assisted small and medium enterprises (SMEs) to better manage the challenging operating conditions. The overall proportion of SME loans under repayment assistance increased to 21.6% of total SME loans in June 2021 although the share of loans that have significantly increased credit risks was lower at 14.6%. Banks also continued to lend to viable SMEs, while various financing guarantee schemes remain available to complement direct bank lending to these segments.

Household sector affected by the pandemic crisis but exhibiting financial resilience

While most household borrowers remain resilient with prudent debt service ratios and sufficient financial buffers, some borrowers are facing greater financial stress. Based on simulations, 11%-15% of household borrowers may need to drawdown on their cash buffers to service debt. Of these borrowers, 1.9% are at risk of depleting their cash buffers. In the short term, the flexibility provided for households to withdraw their retirement savings early has provided an additional source of funds to help them tide over current financial strains. However, over the longer term, the drawdown of such savings could compound future difficulties for households who already face insufficient savings for retirement.

In the meantime, distressed borrowers continue to be supported via repayment assistance programmes. The share of household borrowers under repayment assistance rose sharply to 25.4% of total household loan accounts in July, in line with the further expansion of repayment assistance by banks. However, this is expected to decline  as the economy gradually reopens and households see less need to build up precautionary buffers. The exposures of banks to higher-risk borrowers with thinner buffers remains low. Banks have put in place appropriate risk assessments and continue to lend to the eligible borrowers.

Domestic financial system remains well-positioned to withstand shocks and support economic recovery

The economy is likely to gradually improve going into 2022. The recovery prospects for the domestic economy, however, is expected to be uneven across sectors and remain subject to some degree of uncertainty given developments surrounding COVID-19, both globally and domestically. Banks have continued to increase provisions for credit losses in anticipation of rising impairments as repayment assistance programmes are gradually unwound. The loan loss coverage ratio has remained around historically high levels at 129%, reflecting the higher degree of stringency in the provisioning practices of banks. More broadly, banks, insurers and takaful operators continue to have sufficient financial buffers to absorb potential losses under severe macro-economic and financial conditions, while sustaining support for economic recovery.

Establishment of Financial Sector Cyber Threat Intelligence Platform (FinTIP)

With the need to keep remote and flexible working arrangements in place for an extended period of time, as well as greater digitalisation of financial services that also rely on third party service providers, managing risks from information technology disruptions and cyber-attacks continues to be a high priority for the sector. Ongoing, significant investments by financial institutions to strengthen business continuity plans and cyber risk resilience remain critical to reduce operational risks, both at the institution and system-wide levels.

The Financial Sector Cyber Threat Intelligence Platform (FinTIP), which is overseen by BNM, commenced operations in September 2021 to enhance the financial industry’s cyber resilience. FinTIP is a round-the-clock industry cyber threat intelligence platform that collects, aggregates, analyses and disseminates cyber threat intelligence to and from financial institutions and other key stakeholders in a timely manner. The deeper and faster information sharing and collaboration are expected to strengthen the financial industry’s response capabilities to the evolving cyber threats affecting the financial system.

See also:

• BNM Financial Stability Review - First Half 2021
• Key Highlights