Banking sector remains resilient against financial macroeconomic shocks

CORONAVIRUS | While the Covid-19 pandemic is posing a challenge for banks, the capitalisation of the banking sector remains strong and resilient against potential stress arising from adverse financial and macroeconomic shocks.

In its Financial Stability Review - Second Half 2019 report released today, Bank Negara Malaysia (BNM) said banks are expecting weaker credit growth this year compared with 2019, but this remains significantly dependent on the duration of the pandemic.

“While the impact of Covid-19 on the economy is likely to be significant in the short term, banks are entering this period from a position of strength, with significant capital and liquidity buffers.

“The prudent management of credit risks and diversified income sources will provide support to profitability. In addition, banks’ digitalisation strategies are expected to drive further operational efficiencies, lending additional support to long-term profitability and overall viability,” it said.

In the wake of the Covid-19 pandemic, BNM said, banks are expecting an increase in the share of restructured and rescheduled loans, particularly by borrowers in the business segments that have been most affected by the pandemic.

It said this would likely increase provisions over the short term. However, banks are well-positioned to absorb the potential impact on profitability, given the prudent provisioning buffers built up over the years.

Total provisions, including regulatory reserves, held by banks against credit losses stood at RM33.9 billion, or 126.4 per cent of impaired loans, as at end-2019.

In response to the pandemic, BNM has announced a series of regulatory measures in support of banks' efforts to assist affected households and businesses, whereby banks have been allowed to draw down on capital and liquidity buffers to support lending activities.

“These buffers, which have been built up over the years, along with liquidity management by BNM, have placed banks in a strong position to support the economy during these challenging times.

“The sustained profitability of banks, underpinned by sound underwriting and risk management practices, will also help banks gradually restore their buffers once the flexibilities are lifted,” the central bank said.

In the second half of 2019, banking system profitability was sustained above the estimated average cost of capital, further strengthening banks’ solvency positions, while pre-tax profits recorded an annual growth of 15.4 percent supported by strong growth in non-interest income.

BNM said profit-taking by banks in the government bond market amid declining yields in the second half of 2019 drove higher trading and investment income.

The growth in fee and commission income has also been consistent with recent strides by banks to diversify revenue sources through the cross-selling of wealth management and insurance products, it added.

- Bernama

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