Malaysian banks remain well-capitalised despite lower earnings in 2H 2023

Deposits up, external debt limited

20 Mar 2024 11:45am
Photo for illustration purpose only. - FILE PIX
Photo for illustration purpose only. - FILE PIX

KUALA LUMPUR - The liquidity and funding positions of the banking system remained strong in the second half of 2023, Bank Negara Malaysia (BNM) said.

In its Financial Stability Review for the second half of 2023 (2H 2023), the central bank said the aggregate liquidity coverage ratio and net stable funding ratio remained healthy and well above regulatory minima, at 160.9 per cent and 118.2 per cent, respectively, as at end-December 2023.

"Banks’ holdings of high-quality liquid assets increased further (RM758.3 billion; June 2023: RM744.3 billion), mostly in the form of central bank placements and government bonds, which banks can pledge in the interbank market or with BNM for access to additional liquidity,” it said.

BNM said banking system deposits continued to grow, mainly driven by businesses and individuals, in line with the improvements in business activities and household incomes.

Resident individual and business deposits (including non-financial public enterprises) accounted for the bulk of banking system deposits at 35.6 per cent and 34.1 per cent, respectively.

These continued to provide a stable source of funding for banks amid lower deposits of non-bank financial institutions and the government in some periods during the 2H 2023, it said.

Meanwhile, BNM said banks’ external debt increased by RM9 billion in the 2H 2023 to RM424.5 billion, driven by foreign currency (FCY) interbank borrowings, which some banks used to obtain ringgit funding via FCY swap arrangements.

"Depending on prevailing market conditions, such funding arrangements could be a source of ringgit funding at a lower cost compared with directly borrowing ringgit from domestic money markets.

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"This remained relatively small as a share of banking system total funding, consistent with the historically low level of dependence on external debt by banks in funding their ringgit operations,” BNM said.

Overall risks from banks’ external debt continued to be limited. The bulk of total banking system external debt exposures (78.6 per cent; June 2023: 79.3 per cent) is with related counterparties or in the form of long-term, stable debt, thereby limiting rollover or withdrawal risks.

Banks maintained sizeable FCY liquid asset buffers, sufficient to cover up to 2.4 times (June 2023: 2.4 times) of total FCY external debt-at-risk.

On earnings, BNM said banks’ earnings declined year-on-year and were lower relative to the 1H of 2023.

However, profitability continued to be supported by lending activities amid continued compression in interest margins due to higher funding costs.

The central bank said a slight improvement in trading and investment income in 2H 2023 of RM6.3 billion versus 1H 2023’s RM6.1 billion provided some support to banks’ profitability. This was partially driven by a decline in domestic bond yields in the second half of 2023.

While banks’ holdings of government bonds increased marginally to 10.3 per cent of total banking system assets versus June 2023: 10.1 per cent, their exposure to interest rate risk remains manageable.

"This was helped by strategies to reduce the duration of government bond holdings. Amid expectations of interest rates having peaked, banks of late have rebalanced their new government bond holdings from amortised cost to fair value through other comprehensive income.

"Potential revaluation gains could provide further support to banks’ capital positions, should yields decline going forward,” BNM added. - BERNAMA