MFRS 9 a game changer for Malaysian banks

KUCHING: The introduction of the new Malaysian Financial Reporting Standard ( MFRS) 9 Financial Instruments: Recognition and Measurement, which replaces MFRS 139, is projected by RAM Ratings to be a game changer for Malaysian banks.

To note, MFRS 9 will take effect on January 1, 2018.

With the aim of addressing a key concern that had arisen during the global financial crisis – that credit losses are recorded too late in the economic cycle – this new accounting standard will introduce a new impairment model based on expected credit losses, thereby bringing forward the recognition of credit losses.

RAM noted that to better gauge the banking industry's readiness with respect to MFRS 9, RAM Ratings conducted a survey in July- October 2016 among 20 financial institutions in Malaysia.

This survey aims to identify the common potential challenges

We view the introduction of MFRS 9 as a prudent move, as it will accelerate the recognition of credit losses. Sophia Lee, co-head of financial institution ratings

and practical issues ( including the availability of technical expertise and historical data as well as the interpretation of MFRS 9) that will be faced by the Malaysian banking industry, along with the effects arising from the implementation of MFRS 9.

“We view the introduction of MFRS 9 as a prudent move, as it will accelerate the recognition of credit losses.

“While we have yet to observe the full impact of this standard on individual banks or the industry as a whole, we believe that this new approach will prompt banks to adopt a more risk- based approach in executing their business strategies.

“Banks' loan-pricing strategies are also likely to be affected, given the expected heftier provisioning and additional costs related to MFRS 9,” co-head of financial institution ratings Sophia Lee noted.

RAM highlighted that most banks in Malaysia are expected to have adequate levels of capital or regulatory reserves (if allowed) to absorb the impact of higher loan- loss allowances.

“Banks have also been prudent in recent years, as reflected by the industry's healthy asset quality,” the ratings firm said.

“As at end- November 2016, the system's gross impairedloan ( GIL) ratio stood at a commendable 1.6 per cent while its GIL coverage ratio remained at a comfortable 91.1 per cent.”

As such, RAM expects most of the domestic banks to be able to manage the impacts of MFRS 9 adoption.