23 October 2020, Friday | 10:20am

Malaysian banks’ capital buffers intact despite earnings squeeze


PETALING JAYA: Domestic banks reported a marked decline in earnings from domestic banking activities during the first half of the year weighed down by further margin compression and higher provisions for credit losses.

However, despite the decline, Bank Negara Malaysia (BNM) said the banking system continues to be well positioned to support credit flows to the real sector as the economy gradually begins to recover.

In its “Financial Stability Review for the First Half of 2020” report, the central bank highlighted that annualised credit costs as a share of total outstanding loans rose significantly from the low levels over the past decade to 56 basis points (bps) (average for 2010-2019: 20 bps) – a level last seen during the 2008 Global Financial Crisis.

Banks were also impacted by a one-off contract modification loss due to the waiver of additional interest charges for hire-purchase loans and fixed-rate Islamic financing under the repayment moratorium measures. This further compressed narrowing margins from successive Overnight Policy Rate cuts.

“Market valuations of banks as measured by the median price-to-book (P/B) ratio have fallen further since 2019, reflecting the weaker macroeconomic outlook and earnings expectations.

“Bank-specific factors and more cautious investor sentiment also contributed to a fairly wide dispersion of P/B ratios across banks, with several banks reporting P/B ratios below one,” it said.

BNM also said the overseas operations of domestic banking groups (DBGs) experienced a decline in profitability for the first half of 2020, as banks in the region were similarly affected by slower economic activity as a result of Covid-19 containment measures and a deterioration in asset quality.

“Risks from the overseas operations of DBGs are likely to be manageable, as banks’ overseas credit exposures to sectors directly affected by the pandemic are relatively small, ranging between 0.1%-5.3% of overall group exposures.

“Major overseas subsidiaries also continue to maintain relatively high levels of capital, which serve as strong buffers against potential credit losses. This will limit the need for capital support from the domestic parent banks,” it stated, adding that based on stress tests, most foreign subsidiaries have sufficient capital to withstand severe shocks amid the pandemic.

Overall, all banks remained well capitalised throughout the first half of 2020, with aggregate capital buffers amounting to RM121.6 billion as at June 2020.

“In anticipation of the more challenging economic outlook, banks are shoring up their buffers, either through new capital issuances or dividend reinvestment plans. Most banks have also reduced or deferred dividend payouts to shareholders.”

Financing conditions have been further supported by lower borrowing costs following recent monetary policy easing. In contrast, demand for financing by households was generally weaker reflecting more uncertain income and employment prospects.

Looking ahead, BNM said banks are expecting some recovery in household loan growth in the second half of 2020 amid low borrowing costs and improving labour market conditions.

Source: The Sun Daily



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