Banks maintain strong capital and liquidity buffers
According to Bank Negara Malaysia (BNM), the country’s banking system remained well-capitalised throughout the first half of 2023 (1H 2023), with the banks continuing to maintain strong liquidity buffers. This enables them to support the financing and protection needs of households and businesses, as well as to absorb potential shocks and losses.
In its Financial Stability Review for 1H 2023, BNM reported that the total capital ratio of the banking system stood at 18.5 per cent at the end of June 2023, with capital buffers of RM138.5 billion in excess of the regulatory minimum. The aggregate liquidity coverage ratio and net stable funding ratio also remained well above the regulatory minima at 154.4 per cent and 117.0 per cent, respectively.
The insurance and takaful sector also remained resilient, with the aggregate capital adequacy ratio and excess capital buffers at 225 per cent and RM38.8 billion, respectively, as of end-June 2023.
Banks adopt sustainable practices and align with environmental goals
BNM Deputy Governor Jessica Chew said that financial institutions are also making progress in aligning their business operations with environmental and sustainability goals. She said that financial institutions are increasingly adopting sustainable investment and lending practices, as well as expanding green financial solutions.
“To this end, addressing data needs and capacity building in climate risk management continue to be an ongoing priority for financial institutions, through collaborative efforts supported by the Joint Committee on Climate Change (JC3) with private industry and government agencies,” she said.
BNM also noted that banks have been actively engaging with borrowers affected by the pandemic to provide repayment assistance and restructuring programmes. The share of loans under repayment assistance programmes declined further to 4.2 per cent of total banking system loans as of end-June 2023.
Banks face challenges from volatile market conditions and uneven recovery
Despite the positive developments, BNM also cautioned that banks face challenges from volatile market conditions and uneven recovery across sectors. The central bank said that domestic market conditions remain orderly, reflecting the smooth intermediation of two-way flows in the bond and equity markets.
However, it also said that banks need to be vigilant against potential spillovers from external shocks, such as changes in global monetary policy stance, geopolitical tensions, and cyberattacks.
Additionally, BNM said that although domestic business activity has improved considerably in 1H 2023, recovery remains uneven as certain sectors continue to face challenges arising from elevated input costs and weak external demand.
“Most businesses are expected to be able to withstand potential new shocks amid improvements in business leverage, healthy cash buffers, and more agile business models. However, climate-related risks and opportunities are more likely to be important considerations for businesses,” it said.
BNM also urged households to exercise prudence in managing their debt obligations and financial commitments, especially in light of the uncertain economic outlook. It said that the household debt-to-GDP ratio remains stable at 81.9 per cent, while the median debt-to-income ratio for overall households had been broadly stable at 1.4 times.
