First Half Financial Stability Review By BNM: Depite Volatility Market Remained Orderly

Bank Negara in its first half financial stability review alluded that despite continued heightened volatility in the domestic financial markets, market conditions have remained orderly with the smooth intermediation of two-way flows in the bond and equity markets.

The US dollar has strengthened significantly and has remained at a two-decade high due to aggressive policy rate hikes in the US 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.

Businesses continued to show improvement in financial performance

The financial performance of businesses continued to improve in line with the full resumption of economic activities and reopening of international borders. However, recovery remains uneven and has been slower in certain economic sub-sectors. Overall business loan impairments remain low at 1.1% of total banking system loans. The share of business loans with higher credit risk has continued to decline to 14.4% of total business loans in line with the gradual improvement in business conditions. The share of SME loans under repayment assistance has halved to 13.1% of total SME loans (or 2.3% of total loans from the banking system and development financial institutions). 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. 

Household resilience continued to be supported by improving economic and labour market conditions

The ratio of household debt-to-GDP has reverted closer to pre-pandemic levels at 84.5%. 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.

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. Risks associated with such borrowers are expected to be contained.

Domestic financial system remains well-positioned to withstand shocks and support economic recovery

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% for banks and 209% for insurers and takaful operators. This will enable them to continue supporting  households’ and businesses’ financing and protection needs as economic activities resume.

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