• Overall households’ and businesses’ debt repayment ability remains healthy amid sound lending standards maintained by banks
• The healthy buffers of financial institutions continue to preserve their resilience against unexpected losses and enable them to support financial intermediation
• Preservation of operational and cyber readiness of financial institutions remains a priority

Bank Negara Malaysia (BNM) released the Financial Stability Review for the First Half of 2023 today.

Domestic financial markets remain orderly

Despite continued heightened volatility in the global financial markets, domestic market conditions remain orderly. This was reflected in the smooth intermediation of two-way flows in the bond and equity markets. Ringgit continued to be primarily influenced by external developments. However, foreign exchange (FX) risk exposures in the corporate and banking sectors remain manageable. This was underpinned by banks’ sizeable foreign currency liquid asset buffers and corporates’ prudent FX risk management practices. Continued onshore FX market liquidity is enabling orderly adjustments to external developments. This will support businesses and market participants in managing their FX exposures and allocation of resources.

Businesses continued to show improvement in financial performance amid ongoing challenges

Domestic business activity has improved considerably. However, recovery remains uneven as certain sectors continue to face challenges arising from elevated input costs and weak external demand. Overall business loan impairments remain low at 1% of total banking system loans. The share of SME loans with higher credit risk (classified as Stage 2^[1]) remains small at 2.1% of total banking system loans. The share of SME loans under repayment assistance declined further to 5.5% of total SME loans (or 0.9% of total loans from the banking system and development financial institutions). SMEs that have exited repayment assistance programmes have largely been able to sustain their loan repayments.

Businesses are likely to face continued headwinds such as elevated costs and weak external demand. In addition, climate-related risks and opportunities are more likely to be important considerations for businesses. However, most businesses are expected to be able to withstand potential new shocks amid improvements in business leverage, healthy cash buffers, and more agile business models.

Income and employment growth continues to support household resilience

The household debt-to-GDP ratio remains stable at 81.9%. The median debt- to-income (DTI) ratio for overall households had been broadly stable at 1.4 times amid sound lending standards maintained by banks. Other measures of households’ debt repayment ability also indicate limited new risks. The median debt service ratios (DSRs) for newly approved and outstanding household loans remain prudent at 42% and 36%, respectively. This is helping to preserve healthy loan servicing buffers among households. The share of Stage 2^[1] household loans has declined further to 4.6% of total household loans (or 2.7% of banking system loans) from 6.7% as of December 2022. Banks remain vigilant of risks associated with higher borrowing costs and the performance of borrowers that are exiting repayment assistance programmes extended during the pandemic. Any drop in household borrowing quality is expected to be well within the existing provisioning and capital buffers of the banking system.

Preserving operational and cyber resilience of financial institutions remains a high priority

Financial institutions continue to invest significant resources in managing operational and cyber-related risks. The launch of the National Scam Response Centre (NSRC) in October 2022 has allowed for more efficient actions to combat financial scams. Financial institutions are cooperating with law enforcement agencies through the NSRC to clamp down on mule accounts used to facilitate financial scams. Significant resources will continue to be directed towards increasing public cooperation in reporting fraud incidents and raising awareness of safe banking.

Financial institutions are also making progress in aligning business operations with environmental and sustainability goals. Bank Negara Malaysia Deputy Governor Jessica Chew says, “Financial institutions are increasingly adopting sustainable investment and lending practices, as well as expanding green financial solutions. To this end, addressing data needs and capacity building in climate risk management continue to be an ongoing priority for financial institutions, through collaborative efforts supported by the Joint Committee on Climate Change (JC3) with private industry and government agencies.”

Domestic financial system remains resilient

Banks continued to maintain strong liquidity buffers. The aggregate Liquidity Coverage Ratio and Net Stable Funding Ratio remained well above regulatory minima at 154.4% and 117.0%, respectively. The banking system remains well- capitalised. The total capital ratio stood at 18.5% at end-June 2023 with capital buffers of RM138.5 billion in excess of the regulatory minimum. Similarly, the insurance and takaful sector also remained resilient. The aggregate capital adequacy ratio and excess capital buffers stood at 225% and RM38.8 billion, respectively, as of the end of June 2023. The strong buffers of banks, insurers, and takaful operators will continue to ensure the financial system’s resilience against future shocks and unexpected losses. This will enable them to continue to support the financing and protection needs of households and businesses.

^[1] Stage 2 loans are loans that have exhibited deterioration in credit risk, for which banks are required to set aside provisions based on lifetime expected credit losses based on the Malaysian Financial Reporting Standard 9.

See also: Financial Stability Review First Half 2023 

Bank Negara Malaysia
9 October 2023