KUALA LUMPUR (March 29): Banks in Malaysia continued to maintain healthy liquidity buffers of RM134.8 billion as at December last year, above the regulatory minimum, according to Bank Negara Malaysia (BNM).  

At the system-wide level, the liquidity coverage ratio remained healthy at 154% and the net stable funding ratio at 118.2% as at December 2022. This enabled banks to support lending households and businesses, while providing buffers against the impact of rising interest rates for high-quality liquid assets held to meet liquidity needs and other liquidity shocks.

“While the rising interest rate environment has placed some pressure on the value of banks’ high-quality liquid assets, banks continued to have sufficient high-quality liquid assets (December 2022: RM753.4 billion) to meet stressed cash outflows over at least a 30-day period,” said BNM in its Financial Stability Review report for the second half of 2022.

Improvements in profitability, along with capital conservation strategies being maintained by most banks, will further reinforce the capacity of banks to support intermediation and absorb unexpected losses. 

As such, the central bank said significant deposit concentrations, combined with weak capital buffers that could materially increase vulnerabilities to deposit runs, are also not currently observed among banks in Malaysia.

Meanwhile, BNM observed that credit costs had begun to normalise to pre-pandemic levels, and are expected to decline further, as banks start to write back some of the Covid-19 pandemic-related management overlay provisions.

“This will provide additional support for banks’ earnings and capital going forward,” BNM noted.

Banks’ annualised credit cost ratio stood at 20 basis points (bps) as at December 2022, versus an average of 14 bps from 2015 until 2019. During the pandemic, banks’ annualised cost ratio hit 65 bps in December 2020, and continued at elevated levels of 41 bps in June 2021 and 42 bps in December that year.

Moving forward, while credit conditions are expected to broadly improve along with economic growth, BNM warned that elevated levels of input costs for businesses and living expenses for households could pose some downside risks to impairments in 2023.  

With that, loan-loss coverage ratios, including regulatory reserves, nonetheless remained high (December 2022: 118.2%; June 2022: 115.3%; 2015-2019 average: 112.5%), as banks remained vigilant against unfolding credit risks, particularly for loans that were still under, or newly exiting, repayment assistance programmes.

Banks’ earlier build-up of provisions continued to provide prudent buffers against future expected losses, with the ratio of total provisions to total loans remaining well above pre-pandemic levels, despite the modest release in provisions during the year (December 2022: 1.7%; 2018-2019 average: 1.4%).

Source: TheEdge - 29 Mar 2023