Kuala Lumpur: The domestic banking system’s pre-tax profit improved slightly to 16.7% year-on-year in the first half of 2021 (1H2021) from 14.8% in 1H2020, resulting in higher returns on assets and equity. high of 1.1% and 9.7 percent. However, Bank Negara Malaysia (BNM) said that despite this rosy performance, stock market valuations of listed banks have remained volatile and continue to reflect cautious investor sentiment amid a weaker future earnings outlook due to the lag in the market. economic recovery. “We plan to continue to strengthen provisions in 2H2021, given the increased stress facing some borrowers.
“However, this is expected to fade with the return to more targeted repayment assistance, as well as greater ability of banks to differentiate borrowers’ repayment capacity as large-scale repayment assistance measures are introduced. gradually phased out, “he said. In its “Financial Stability Review – First Half of 2021” report released on Wednesday, the central bank said loan growth is also expected to improve as containment measures are eased along with the advancement of the national immunization program. , thus providing additional support to profits. He noted that most of the overseas operations of domestic banking groups (DBGs) recorded an improvement in profitability, mainly due to the decrease in provisions made this year compared to 2020. Bank operations in Singapore, which are the most important, recorded a strong recovery. in parallel with the resumption of economic activities in the republic, Covid-19 infections being effectively contained. The result of operations in Indonesia and Thailand also benefited from a lower increase in provisions for impairment. However, the overall performance of overseas operations was penalized by operations in Hong Kong, mainly due to higher allowances from additional management overlays allocated to borrowers with high credit risk. According to the BNM, the relief measures implemented throughout 1H2021 continued to support the asset quality of DBG’s overseas operations, which remained broadly stable. Exposures abroad to sectors directly and indirectly affected by the pandemic are also relatively low, ranging from 0.02% to 7.2% of the gross loans of the various DBGs. “In addition, liquidity and funding risks in key jurisdictions remain manageable as the business is largely funded by customer deposits. “During this period, most of DBG’s overseas operations observed an increase in short-term deposits resulting from relief measures implemented in the respective jurisdictions. “The capital reserves held against overseas operations remain strong and should reduce the need for any reliance on parental support,” he said.
As the resurgence of Covid-19 cases in some jurisdictions continues to cloud the outlook for credit risk, stress tests conducted by the BNM on overseas operations say all major foreign affiliates of DBGs should have sufficient capital to withstand potential shocks in extreme stress scenarios. , without additional support from their respective parent DBGs. The central bank noted that the external debt of the banking system increased slightly in 1H2021 to reach 341.4 billion ringgit from 337.2 billion ringgit in December 2020, due to the weakness of the ringgit against some major foreign currencies. and regional. The increase in interbank borrowing by a few DBGs as part of their centralized liquidity management operations also contributed to the increase in the banks’ overall external debt. “These trends reversed in the second quarter of 2021, with banks’ total external debt (as a percentage of total funding) remaining low and in line with the historical average of 7.7%. “Improving profits from their domestic and foreign operations has enabled banks to maintain healthy capital buffers,” he said. BNM said this allowed some banks to cautiously resume dividend payments that had previously been halted or reduced to conserve capital, although a number of banks maintained dividend reinvestment programs to protect their reserves. capital, given the lingering uncertainties about the outlook for the economy. Banks continued to maintain strong capital positions, with excess capital buffers above the regulatory minimum remaining high. Going forward, the general financing conditions should continue to support intermediation activity. However, some banks could face larger deposit withdrawals from individuals and businesses that have been more severely affected by the implementation of the Comprehensive Movement Control Order. “The significantly higher reliance on repayment assistance under the Pemulih program, as well as the withdrawals of non-bank state-owned enterprises to support additional relief measures could also increase liquidity pressures for some banks, while that the massive outflows of non-residents could further exacerbate these risks. . “Nonetheless, banks’ liquidity positions are expected to remain resilient to these pressures,” he said, adding that the availability of the flexibility of the legal reserve requirement until the end of 2022 will further support the capacity of banks. banks to respond to potential liquidity strains. A top-down stress test conducted earlier this year continued to capture the spectrum of possible severe economic and financial shocks that sufficiently test the resilience of financial institutions. This, in part, reflects the high degree of caution around repayment assumptions that has been built into the stress test when translating applied shocks into potential losses for financial institutions. Stress testing is an integral part of the BNM’s financial stability framework. An update to the multi-year, top-down stress test will be published in the Financial Stability Review for the second half of 2021, in line with previous annual stress test cycles, he said. “As part of the BNM’s ongoing prudential assessments, individual banks have been required to submit their stress test results based on a hypothetical stress scenario with a weaker-than-expected economic recovery path, s ‘extending until the end of 2022, “the central bank said. He noted that the scenario assumed that the recovery of the national economy would be gradual and not expected until around 2H2022, and that repayment assistance loans would continue to increase in 2021 before waning. by the end of 2022 in line with the assumed economic recovery path. Credit risk also remains the main driver of potential losses for banks, with top-down and bottom-up stress tests showing a larger share of losses coming from the corporate sector. “Overall, as part of the bottom-up exercise, the median decline in the total capital ratio by the end of 2022 is 4.4 percentage points (ppts), with an interquartile range of 5.9 ppts ( first quartile: 2.1 ppts, third quartile: 8 ppts) ”, he added.