Stress test shows Malaysian lenders resilient


The latest stress test results of Malaysian banks indicate the banks are credit positive as they have resilient capital and earnings buffers against macroeconomic and financial stress.

Moody’s Investors Service Inc, in reference to the results of Bank Negara Malaysia’s (BNM) solvency stress test on local banks, noted that the test used three hypothetical domestic gross domestic product (GDP) rates — one baseline scenario and two adverse scenarios — 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 adverse scenario simulated an L-shaped trajectory with the growth rate remaining low after a mild initial decline.

Under the baseline scenario, the banks’ system-wide total capital adequacy ratio would decline by about 50 basis points (bps) over the four-year period, while the ratio would slide by some 150bps in the first adverse scenario and about 200bps in the second adverse scenario.

Moody’s said under both adverse scenarios, the system-wide total capital ratio would remain above the regulatory minimum of 10.5% — including a capital conservation buffer of 2.5% — at the end of 2021.

“This shows that banks are resilient to potential shocks and tail risks, and have sufficient earnings and capital buffers to absorb potential losses,” the bond credit rating firm said in a note yesterday.

BNM’s report noted that over 90% of capital losses under the stress test scenarios would result from credit losses.

In the adverse scenarios, the system- wide gross impaired loan ratio would jump to 5% in the first scenario and 9% in the second scenario, from 1.5% at the end of 2017, and loss-given defaults would rise as high as 80%.

Losses from household loans would account for 34% to 38% of total capital losses, while an estimated 60% of the capital erosion caused by credit losses would be derived from corporate loans.

The central bank’s findings also indicate continued moderation in leverage among households and corporations in the country, 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,” Moody’s said.

Household debts in Malaysia declined to 4.9% last year from 5.4% in 2016, the slowest pace since a peak of 14.2% in 2010 due to a decline in higher-risk consumer loans such as personal loans, auto loans and mortgages on non-residential properties.

Overall household debts in the percentage of GDP slid to 84% as at end-2017 from 88% a year earlier.

Banks’ exposures to the highest-risk households such as low-income households fell to 17% of total household loans in 2017 from 19% the year before.

Growth in aggregate non-financial corporate debt slowed to 3% last year from 9% the year prior, with total corporate debt decreasing to 103% of GDP from 110% previously.