• BNM provided a briefing yesterday following the release of its publication on 1H2023 Financial Stability Review (FSR).

• Despite a challenging operating environment, the overall debt servicing capacity of businesses remained healthy. The operating margin for the overall business sector slid to 6% in 2Q23 (4Q22: 6.9%). The overall interest coverage ratio (ICR) stood at 5.5x. ICRs of export orientated businesses in the agriculture, mining, quarrying and manufacturing sectors were higher than the prudent threshold of 2x. Debt to equity ratio of businesses improved to 20.6% in 2Q23 vs. 22.5% in 4Q22 while the cash-to-short-term debt (CASTD) ratio rose marginally to 1.5x in 2Q23 compared to 1.4x in 4Q22.

• Certain business sectors (manufacturing and construction) continued to face headwinds in operations due to high input cost and weak external demand. Input costs remain elevated as a result of higher import prices, weaker domestic currency, and a rise in electricity and labour costs. Firms at risk in the manufacturing/construction sector rose to 24.1%/41.1% in 1H23, higher than the pre-pandemic 5-year (2015-2019) historical average of 18.1%/23.5%.

• In 1H23, business loans grew at a slow pace of 0.7%, attributed to moderated growth in financing to corporates. In contrast, loans to SMEs expanded at a faster pace of 6.4% vs. 3.5% in 4Q22.

• The overall business loan impairment ratio remained steady at 2.8%. However, SME loan impairments increased slightly with certain borrowers missing repayments. The SME impairment ratio rose to 3% compared to 2.9% in Dec 2022, contributed by arrears for loans granted to wholesale, retail, construction and agricultural sectors. SME loans under stage 2 fell to 12.4% vs. 12.8% in Dec 2022. The share of SME loans under repayment assistance declined marginally to 5.5% (Dec 2022: 5.6%) or 0.9% of the total banking system and development financial institution (DFI) loans. We gather that new enrollments of SME loans into repayment assistance have stayed low at 0.1% of total SME financing.

• Minimal exposure of Malaysian banks to China’s real estate. Low exposure of total banking system loans and bonds to China property sector at less than 0.1%. The existing exposure has been well covered by banks’ conservative provisions. Unsold units by China’s property developers made up 10% of total properties which have yet to be sold while the share of non-resident property to the total residential property transactions in Malaysia was low at 0.2%.

Source: AmInvest Research - 10 Oct 2023