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Bank Negara Malaysia Financial Stability Review - First Half 2019

Ref No : 09/19/03 18 Sep 2019 Embargo : Not for publication or broadcast before 1700 hours on Wednesday 18 September 2019

Domestic financial stability remained intact in the first half of 2019, amid continued challenges in the external and domestic environment. On the global front, financial vulnerabilities remained elevated on concerns of slower global growth and rising geopolitical tensions which contributed to increased volatility in financial asset and commodity prices. The ongoing trade tensions have also weighed on external demand and regional growth prospects. These developments, coupled with concerns over the review of Malaysian government securities in two global benchmark indices, saw periods of increased volatility in the domestic financial markets. Risks to domestic financial stability however continued to be largely contained, supported by relatively resilient domestic economic growth, orderly market conditions and sound financial institutions.

Domestic financial markets remained orderly despite domestic and external headwinds
Despite increased volatility in financial markets due to both global and domestic developments, orderly conditions were preserved. Strong domestic institutional investors, including financial institutions, have continued to provide an important source of stability to the domestic markets during periods of heavy portfolio outflows. This in turn has supported stable domestic funding conditions for businesses and households. Active risk management and hedging strategies by banks continued to contain market risk exposures at manageable levels, well within prudent internal loss limits. This in part reflects greater caution observed by banks amid prevailing uncertainties during the first half of 2019. Similarly, insurance and takaful operators also continued to actively manage their investments in line with their liability structures.

Overall household debt level continued to be elevated 
The overall household debt level remained elevated at 82.2% of GDP, with loans for the purchase of residential properties continuing to be the key driver of debt growth. Aggregate household financial assets continued to expand at a faster pace than that of debt, sustaining household financial asset buffers at 2.2 times of debt. Although most households continue to be able to comfortably service their debt, pockets of risks remain. Higher incidents of default have been observed among housing loan borrowers that are more exposed to income variability. Although the share of household debt held by borrowers earning less than RM3,000 per month has continued to decline over the years, the leverage of these borrowers has risen steadily largely due to housing loans which have been made more accessible under various loan assistance schemes introduced in recent years. This borrower group remains susceptible to financial distress given their limited financial buffers to weather potential shocks. Risks to financial stability, however, remain largely contained given the low exposures of banks to higher-risk borrowers as banks continued to maintain sound lending practices. The implementation of the National Strategy for Financial Literacy 2019 – 2023 and the proposed enactment of the Consumer Credit Act are expected to further strengthen household resilience and mitigate future risks.

Firm demand sustained for affordable housing
House prices continued to expand at a more moderate pace amid sustained demand for affordable properties. Total unsold units have however risen further, mainly driven by properties priced above the maximum affordable house prices in individual states. This contrasts with a strong recovery in housing transactions for units priced below RM500,000 recorded in the first quarter. While the mismatch between housing supply and demand is likely to take some time to resolve, firm demand for affordable housing is expected to mitigate risks of a sharp and broad-based decline in house prices.

Oversupply conditions in the commercial property market continued to persist
In the non-residential segment, the incoming supply of new office space and shopping complexes (OSSC) remains significantly higher than recent average annual demand. This is likely to further compound already elevated levels of vacancy rates for prime office and retail space, and prime retail space per capita in major cities. Banks remained cautious in lending to this segment, with low exposures that continue to be largely performing. Based on the Bank’s sensitivity analysis, banks have sufficient capital buffers to withstand severe losses under adverse stress scenarios in the broad property market which incorporate potential spillovers to other economic sectors that are highly dependent on the performance of the property sector.

Quality of business borrowings sustained despite more challenging business conditions
The financial position of non-financial corporates (NFCs) weakened slightly during the first half of 2019 amid continued challenging business conditions. The median leverage of NFCs increased marginally to 24.9%, as firms in the telecommunication, aviation and utilities sectors were partly affected by adjustments to new financial reporting standards. Lower earnings were also reported by firms in the plantation, transportation, and building and construction materials sectors. Notwithstanding this, the median debt-servicing capacity of firms has remained healthy at 4.5 times. Some positive developments have been observed in the oil and gas, construction and real estate sectors despite continued headwinds. Firms in the oil and gas sector have continued to pare down their debt, with improvements in earnings from higher asset utilisation rates in the offshore segment. The resumption of major infrastructure projects will also benefit firms in the construction sector, alongside continued healthy order books. While the overall impaired loans ratio of the business sector marginally increased in the first half of 2019, this was mainly on account of developments in a few firms and was not broad-based.

The financial sector remained resilient, underpinned by strong capital and liquidity buffers, and sustained profitability
Liquidity in the banking system remained sufficient to support domestic financial intermediation, with the Liquidity Coverage Ratio of the banking system strengthening further over the past six months. As part of efforts to ensure that banks maintain a stable funding profile, the Net Stable Funding Ratio requirements will come into effect on 1 July 2020. Based on data gathered during the observation period, most banks are well-positioned to meet these requirements. Banks, and insurers and takaful operators also maintained strong capitalisation levels, well above the regulatory minimum and higher than internal target capital levels. This is further underpinned by strong buffers against potential losses in line with more forward-looking financial reporting standards and regulatory requirements. In the insurance sector, regulatory reforms are supporting improvements in persistency and pricing, which in turn will sustain longer-term performance.

Stress tests conducted by the Bank affirm the resilience of the Malaysian financial system to severe macroeconomic and financial strains with financial institutions maintaining capital buffers in excess of regulatory minima even under adverse simulated shocks. Moving forward, the Bank remains vigilant to external and domestic developments which may pose risks to domestic financial stability, including weaker global growth prospects amid increased volatility in capital flows, the elevated level of household debt, soft property market conditions and operational disruptions from increasing cyber-threats.

See also

  1. Financial Stability Review - First Half 2019 (Publication)
  2. Key Financial Soundness Indicators
  3. Chart datapack for Financial Stability Review

Bank Negara Malaysia
18 Sep 2019

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