NST Business
KUALA LUMPUR: Malaysia’s banking sector is in much better shape than it was prior to the 1998/1999 and 2009 recessions, industry observers said.
They believe that the banks are facing the twin headwinds of Covid-19 pandemic and low oil prices in a position of strength, with excess capital buffer and continued profitability in the last financial year.
Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias said with Bank Negara Malaysia already lowering its statutory reserve requirement by a total of 150 basis points in recent times, ample liquidity had been flushed into the banking system.
In February 2020, the sector’s total capital ratio stood significantly higher at 18.4 per cent (2008: 12.6 per cent), he added.
“These funds are useful for businesses struggling to make ends meet especially at a time when there is high cash burn rate (declining revenue and having fixed costs to pay),” Nor Zahidi said in a report today.
He said the country’s experience during the 1998/1999 Asian financial crisis had shown that Bank Negara’s lending growth target of eight per cent imposed on banks to complement the National Economic Recovery Plan in 1998, had helped the economy recover in the subsequent years.
The setting up of Danamodal, Danaharta and the Corporate Debt Restructuring Committee then had helped banks to recapitalise and restructure bad debt so that they could continue lending to businesses.
“This is critical especially when history shows that even during a shallower recession in 2009, total loan approvals in the banking system fell by an average of 19 per cent year-on-year between September 2008 and May 2009,” he added.
MARC takes comfort from Bank Negara’s disclosure that households were in a position to face the challenges going forward given their financial asset-to-debt ratio of 2.2 times.
However, with the likelihood of a spike in the jobless rate this year, household balance sheets could come under pressure as incomes deteriorate and lending from banks decline, Nor Zahidi said.
In the midst of the global financial crisis in 2009, the amount of approved loans to households had fallen by an average of 1.5 per cent year-on-year between October 2008 and May 2009, he added.
MIDF Research acknowledged the impact that Covid-19, the loan moratorium and movement control order would have on banks profitability and asset quality.
However, the firm believes that the banks were facing these headwinds in a position of strength due to build up of capital buffer.
“Furthermore, we opine that the moratorium and other measures announced by Bank Negara recently are positive for the banking sector as it addresses the issue of asset quality and liquidity, and to certain extent, cost of fund. It provides much breathing space for the banks,” it added.
MIDF Research noted that the banking system profitability was sustained in the second half of the recent financial year 2019, with return on equity at 13 per cent being above the estimated average cost of capital of nine per cent.
This was despite weakness in net interest income as loan growth was tepid and net interest margin contracted.
“Pre-tax profits of the banking system recorded a growth of 15.4 per cent year-on-year, supported by strong growth in non-interest income as banks took advantage of falling yields in government bonds and sukuks,” it added.