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Domestic market remains orderly despite increasing volatility -- BNM

05/10/2022 04:27 PM

KUALA LUMPUR, Oct 5 (Bernama) -- Domestic market conditions have remained orderly with the smooth intermediation of two-way flows in the bond and equity markets despite continued heightened volatility in the financial markets, Bank Negara Malaysia (BNM) said.

In its Financial Stability Review for the First Half of 2022 released today, the central bank said the US dollar has strengthened significantly and remained at a two-decade high due to aggressive policy rate hikes in the United States and flight to perceived safe US dollar assets. 

“Continued onshore foreign exchange market liquidity is enabling orderly adjustments to external developments. This will support businesses and market participants in managing their foreign exchange exposures,” it said.

According to the review, the financial performance of businesses continued to improve in line with the full resumption of economic activities and reopening of international borders, but recovery remains uneven and has been slower in certain economic sub-sectors. 

“Overall business loan impairments remain low at 1.1 per cent of total banking system loans. The share of business loans with higher credit risk continued to decline to 14.4 per cent of total business loans in line with the gradual improvement in business conditions,” it said.

The review also showed that the share of small and medium enterprises (SME) loans under repayment assistance have halved to 13.1 per cent of total SME loans, or 2.3 per cent of total loans from the banking system and development financial institutions, while SMEs that have exited repayment assistance programmes have largely been able to resume their loan repayments. 

“Businesses are expected to face continued headwinds, including tightening global financial conditions and exchange rate developments. However, additional business defaults under simulated severe stress scenarios are expected to remain manageable. 

“Importantly, various targeted debt management programmes remain in place for SMEs that continue to experience temporary financial challenges,” it said.

Meanwhile, BNM said the ratio of household debt-to-gross domestic product (GDP) has reverted closer to pre-pandemic levels, at 84.5 per cent, and banks continue to maintain prudent lending standards amid a sustained recovery in household lending.

“This is helping to preserve healthy loan servicing buffers among households and their ability to manage the impact of higher borrowing and other costs. The share of household debt under repayment assistance has declined significantly from 18.8 per cent in December 2021 to 2.4 per cent as of June 2022, with a lower share of household debt reported by banks to be of higher credit risk. 

“Household impairment and delinquency ratios increased marginally but continue to remain low and within expectations at 1.2 and 0.6 per cent, respectively,” it said.

The review also noted that some segments of household borrowers with high leverage and lower financial buffers could come under financial stress from rising living costs and higher repayments on floating rate loans. 

“Borrowers under an extended period of repayment assistance are also likely to present higher risks, however, risks associated with such borrowers are expected to be contained.

“The share of household loans classified by banks as exhibiting higher credit risk (Stage 2 loans) has continued to decline to 7.9 per cent (December 2021: 8.5 per cent). It is expected to decline further over the course of the year as more borrowers that have exited repayment assistance programmes complete a minimum ‘observation’ period of loan servicing,” it said. 

BNM said banks have set aside sufficient provisioning buffers against these risks and also continue to extend appropriate support to household borrowers who still face financial challenges.

The central bank also said the strong buffers of banks, insurers and takaful operators will continue to preserve the resilience of financial institutions against potential unexpected losses. 

“Assuming additional severe shocks applied on top of the bank’s stress test, post-shock aggregate capital ratios as at end-2023 remain comfortably above regulatory minimum levels at 15.4 per cent for banks and 209 per cent for insurers and takaful operators.

“This will enable them to continue supporting households’ and businesses’ financing and protection needs as economic activities resume," it said.



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