Malaysian banks adoption of MFRS 9 largely credit neutral

KUALA LUMPUR: The adoption of the Malaysian Financial Reporting Standard 9 (MFRS 9), the new accounting standard for financial instruments, is largely credit neutral, said Moody’s Investors Service.

However, it said MFRS 9 would change how the country’s banks measure, reserve for and report credit losses.

In a statement yesterday, Moody’s Vice President and Senior Analyst Simon Chen said the adoption of the reporting standard does not affect its credit assessment of Malaysian banks as the underlying economics of bank assets remain unchanged.

“We already incorporate forward-looking information into our assessment of a bank’s creditworthiness. “That said, MFRS 9 represents a strengthening in credit practices because of its more proactive stance on requiring higher provisions on underperforming assets and the incentive it gives to the banks to undertake better credit monitoring practices to pre-empt unwarranted credit migration,” he said.

Moody’s said some banks had adopted the standard while others planned to do so at the start of their respective new financial years.

It said initial estimates from the six banks which Moody’s rates in Malaysia indicated a 0-80 basis point decline in Common Equity Tier 1 (CET1) ratios on day one of MFRS 9 adoption.

“However, some banks have indicated that the fair value treatment of non-loan financial assets under MFRS 9 could result in valuation gains and partly offset higher loss allowances.

“The key recurring impact of MFRS 9 is that provisioning expenses will be more sensitive to the origination of new credit assets and credit migration drivers, such as changes in macroeconomic conditions and loan surveillance practice,” the rating agency added.

Chen said Moody’s expects credit conditions in the Malaysian banking system to remain benign over the next 12-18 months and thus, provisioning expenses under MFRS 9 would have a limited effect on subsequent period earnings among Malaysian banks. — Bernama