While acknowledging headwinds in the economy, Bank Negara Malaysia assures, in its Financial Stability Report second half 2022, that business and household risks are manageable for the banking system, which continues to exhibit sound and prudent financial and operational practices.
Maybank Investment Bank Bhd (MIBB) maintains a positive outlook on the sector with BUYs on CIMB, RHB, HLFG, HLBK, AMMB and ABMB. In the business sector, rising input costs have been the challenge, resulting in a decline in the median interest coverage ratio to 6.0x in quarter four 2022 from 7.9x in quarter two 2022.
The share of firms-at-risk edged up to 25.1% in quarter four 2022 from 24.6% in quarter two 2022, driven by firms in the construction and manufacturing sectors, and it remained elevated in the real estate sector.
Bank Negara Malaysia’s stress test nevertheless shows that the median interest coverage ratio for listed non-financial corporates is expected to remain well above prudent thresholds, at 4.5x, under stressed macroeconomic scenarios. The sensitivity analysis assumes, among others, a depreciation of the RM by up to 20% and an increase in the average corporate bond yield by 400 basis points.
Household debt grew at a faster pace of 5.5% in the second half of 2022 from 5.3% in June 2022 and 4.1% in Dec 2021, but with faster gross domestic product growth, the household debt-to-gross domestic product ratio declined to 81.2% in Dec 2022 from 84.5% in June 2022 and 89.1% in Dec 2021.
According to Bank Negara Malaysia’s stress tests, if the unemployment rate rises to as high as 6%, up to 4.3% of household loan exposures could be at risk of default by end-2025. This nevertheless remains comfortably within the banks’ excess capital buffers.
The banking system’s funding position remained strong with an aggregate liquidity coverage ratio and net stable funding ratio of 154% and 118% respectively, end-2022. Loans under repayment assistance programmes stood at 4.2% of total system loans end-2022 with a gross impairment ratio of 1.7%.
According to Bank Negara Malaysia, market-to-market losses from a 200 basis points increase in yields scenario, would reduce the banks’ aggregate capital base by 6.2% or total capital ratio by 1.1%-points from 18.8% end-Dec 2022.
