Investment Highlights

BNM released the Financial Stability Review for 1H20 and held a briefing yesterday for analysts. Below are the key highlights:

• Despite the weaker earnings of banks in 1H20 weighed down by margin compression from consecutive OPR cuts and higher provisions for credit losses, banks maintained healthy capital and liquidity positions. Annualised credit cost rose to 56bps compared to an average of 20bps for 2010-2019. Liquidity coverage ratio (LCR) was sustained at 149.0% in June 2020 while excess capital buffers of RM121.6bil remained strong to withstand potential credit losses.
• The banking sector recorded a CET1 capital ratio of 14.6% and total capital ratio of 18.3% in June 2020 compared to 14.6% and 18.6% respectively in Dec 2019.
• Gross impaired loan ratio for the sector was at a low 1.5%. This was due to most retail and SME loans placed under the automatic blanket loan moratorium for 6 months (1st April to 30th Sept). Also, debt recovery efforts by banks have reduced the outstanding loan impairments for the sector.
• As at 25 Sept 2020, 840,000 borrowers opted out of the loan moratorium. In Aug 2020, repayments of SME and retail loan were at 69% of the levels seen in Mar 2020 (before the commencement of loan moratorium).
• Growth in household debts moderated to 4.0% in 1H20 from 5.5% in 2019 contributed by movement restrictions and decline in consumer spending with households turned more cautious. Despite the slower credit growth, household debtto-GDP ratio rose to 87.5% in 1H20 vs. 82.9% in 2019 amid the contraction in 2Q20 GDP.
• Household continued to hold comfortable levels of financial asset as evidenced by the financial asset-to-debt and liquid financial asset-to-debt ratios of 2.2x and 1.4x, respectively.
• The unemployment rate decreased to 4.7% in July 20 vs. 5.3% in May 2020. Debt servicing ratio of households for outstanding loans was 35.0% and for newly approved household loans, it was 43.0%.
• Nevertheless, there remains stress on some households, particularly the lower income earners. Share of borrowings by borrowers with income below RM3,000 a month (vulnerable segment) to the total banking system loans ascended to 17.6% (2019: 16.7%). Leverage of these borrowers climbed to 9.5x owing to increase in borrowings for purchase of houses during the Home Ownership Campaign (HOC). Also, they continued to hold low liquidity buffers as evidenced by the low liquid asset-to-financial debt ratio of 0.7x which is below the prudent threshold of 1.0x.
• Property market in Malaysia in 1H20 was weaker attributed to decline in market activity while the oversupply conditions in the non-residential property market persist. The Malaysian House Price Index (MHPI) grew at a slower pace of 1.1%.

Source: AmInvest Research - 15 Oct 2020