Stability intact, says Bank Negara
Favourable economy and institutional investors to cushion any risk
PETALING JAYA: Although the benchmark on financial stress of the banking sector is on the rise, any potential risk in the financial market will be cushioned by the favourable outlook of the economy and presence of large institutional investors, according to Bank Negara.
The central bank pointed out that the domestic financial stability was expected to remain intact despite facing external headwinds which had caused global financial market volatility.
The Financial Market Stress Index (FMSI) has been on the uptrend since August last year, with the recent reading at 10.7% as of end-February 2018 – the highest since August 2016.
The FMSI was at its peak in February 2009 when it went above 37% during the global financial crisis. The FMSI recorded its best reading in March 2013, which was below 1%, indicating normal financial market conditions.
Bank Negara pointed out that since the last meeting by its financial stability committee in November 2017, global financial market volatility has increased amid renewed uncertain- ties over the pace of interest rate normalisation in the advanced economies, commodity prices and rising trade tensions.
“External developments are expected to cause bouts of higher volatility amid continued two-way capital flows.
“Potential risks will be cushioned by the favourable outlook of the Malaysian economy and the presence of large domestic institutional investors,” Bank Negara said in a statement yesterday.
It said that the banking, insurance and takaful sectors remained resilient, supported by a high level of capitalisation, as well as favourable funding and liquidity conditions.
Overall capitalisation was expected to remain above the regulatory minimum under severe credit, market and insurance-specific shocks that are comparable with past domestic and global crises, it added.
“Multi-year solvency stress tests affirmed the strong capacity of the Malaysian banks, insurers and takaful operators to withstand simulated macroeconomic and financial stresses,” Bank Negara said.
The health of the country’s financial sector was reaffirmed by Moody’s Investors Service recently when it said that its six rated Malaysian banks would continue to perform this year, following improved profitability in 2017. They would be driven by steady revenue growth, stable net interest margins and a moderation in credit cost.
It said the ongoing digital transformation efforts would support stronger growth in revenue and cost efficiencies.
Moody’s said asset quality would benefit from stronger macroeconomic conditions both domestically and regionally this year.
“Banks with exposure to the oil and gas sector should see their asset quality stabilise on stronger oil prices,” the credit rating firm said.
Meanwhile, in terms of macro-financial linkages, Bank Negara said risks to domestic financial stability from exposures to households were low.
This was underpinned by the fact that the debt-servicing capacity of households remained intact amid low impairment levels on the back of stronger income and employment growth.
“Household financial assets were high, and they grew faster than debt as of end-2017,” the central bank said.
For corporations, it said the overall credit outlook for the business sector was expected to improve given the favourable economic
conditions, although the oil and gas and the property-related sectors were still facing headwinds.
“Potential vulnerabilities from external borrowings of Malaysian corporations are contained with exposures largely hedged and comprising intra-company borrowings with longer maturities,” it said.
On the property market, the central bank said access to house financing, particularly for first-time buyers of affordable houses, was sustained with approval rates at 73%.
Bank Negara said the FSC would continue to monitor the oversupply in the high-end high-rise residential, office and shopping complex segments with banks also remaining cautious on lending.
“The FSC agreed that existing macro-prudential measures remained appropriate in managing vulnerabilities from macro-financial linkages,” it said.