Bnm Stress Test Shows Malaysian Banks Can Withstand Financial Shocks

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Bank Negara Malaysia’s recent stress test reveals local banks can withstand severe macroeconomic and financial shocks and are well-positioned to sustain lending to businesses and households.PETALING JAYA: A highly rigorous stress test conducted by Bank Negara Malaysia (BNM) affirms that an overwhelming majority of Malaysian banks can withstand macroeconomic and financial shocks.
The latest top-down macro solvency stress test to evaluate the resilience of financial institutions was conducted by the central bank in early 2023 and covers a three-year horizon up to end-2025.
“Overall, the results of the stress test affirm that banks can withstand significant macroeconomic and financial shocks and are well-positioned to sustain lending to businesses and households,” said BNM’s Financial Stability Review 2H 2022 released today.
Ads by KioskedOnly two banks out of 54, which account for less than 1% of total banking system assets, are projected to breach the minimum regulatory capital requirements under these adverse scenarios, BNM said.
The vast majority (over 80%) of banks would be able to maintain capital ratios above their internal capital targets, although 24 out of 54 banks, with a cumulative share of 25% of total banking system assets, would report losses in at least one year throughout the stress horizon.

The report added that the aggregate capital ratios of the banking system will remain comfortably above the regulatory minima.
At the end of the second half of 2022, the average total capital ratio of banks was 18.8%, and the loan loss coverage ratio was 118.2%.
Weathering the hypothetical storm
The stress test was conducted under two different scenarios. “The scenarios do not reflect [BNM’s] actual economic forecasts. Rather, they are designed to assess the ability of financial institutions to endure severe shocks,” the report said.
Ads by KioskedThe first adverse scenario (AS1) assesses resilience to temporary but severe disruptions in the operating environment, such as a sharp contraction in the Malaysian economy – by a magnitude larger than during the Covid-19 pandemic.
The second adverse scenario (AS2) tests banks’ ability to weather a prolonged economic slowdown, with negative GDP growth in 2023 and 2024, before mild recovery in 2025.
In an AS1 scenario, BNM foresees unemployment peaking at 5.4%. Under an AS2 scenario, it would likely peak at 6% in 2024 and remain high throughout the stress horizon.
In each of these scenarios, BNM fleshes out the potential impact on banks as a result of changes in the business environment.
By the end of 2025, overall impairments would increase to 6.9% and 7.7% in AS1 and AS2 respectively.
Household borrowers earning below RM5,000 – representing 65% of household borrowers – are projected to be at risk of default under both scenarios.
Ads by KioskedCredit risk would be the main driver of losses. Over the three-year horizon, credit costs are projected to amount to RM53.1 billion (AS1) and RM58.5 billion (AS2), or 58% and 63% of total losses.
Households are the major contributor to the losses at 49%, followed by non-SME business loans (35%) and SMEs (16%).
The losses have increased from projections made in 2H 2021, which put credit cost at RM38.4 billion and RM41.7 billion under AS1 and AS2, respectively.
Revaluation losses on bonds
Meanwhile, banks would likely see sizable revaluation losses on bonds held in fair value at RM36 billion (39% of total loss) or RM33 billion (36%) under AS1 and AS2.
“Banks’ holdings of government bonds have increased since the onset of the pandemic (December 2022: 9.9% of banking system total assets; December 2021: 9.4%; 2015-2019 average: 6.8%),” said BNM.
Ads by KioskedDespite being more exposed to interest rate risks, 35.4% of the bonds held by banks are recorded at amortised costs, which reduce fluctuations in capital positions.
Although this sounds bleak, the total capital ratio under AS1 post-stress is 16.7%, and AS2 remains at 16.3%.
This is more than double the minimum requirement of an 8% total capital ratio.
Even if the bond yields were to rise by 200 basis points, mark-to–market losses only erode the aggregate capital base by 6.2% and the capital ratio by 1.1%, the central bank said.
“Work is ongoing by [BNM] to progressively adopt key elements of the Basel III reforms package to further improve the risk-sensitivity of the capital framework,” it added.
Basel III is an internationally agreed set of measures developed by the Basel Committee on Banking Supervision in response to the global financial crisis of 2007-09. - FMT

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