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Friday, March 28, 2014

Moody's: Malaysian banks resilient to severe credit, market losses

Source: http://www.thestar.com.my/Business/Business-News/2014/03/27/Moodys-Malaysian-banks-resilient-to-severe-credit-market-losses/

KUALA LUMPUR: Malaysian banks are resilient to severe credit and market losses and are able to withstand a scenario worse than the 2008-09 global financial crisis, say Moody's Investors Service.
In its credit outlook issued on Thursday, it said Bank Negara Malaysia's (BNM) report of its stress test of the country's banks showed banks "are well capitalised".
"The results of the stress test (issued by BNM on March 19) are credit positive for Malaysian banks because they show the banks are resilient to severe credit and market losses," it said.
According to BNM's adverse stress test, the aggregate total capital ratio of Malaysia's banks would be 10% under the central bank's adverse stress scenario, while their common equity Tier 1 (CET1) ratio would be 7%.
BNM's scenario included severe loss assumptions such as up to a six-fold increase in probability of default to around 11.6% versus current impaired loan ratios, a 330-basis point increase in yields on government bonds and a severe drop in real estate prices of up to 30%.
Moody's said as of Sept 30, 2013, its rated Malaysian commercial banks had an average CET1 ratio of 9.5%, which was "way above" Malaysia's Basel III minimum requirement of 4.0% for 2014.
It pointed out HSBC Bank Malaysia Bhd (A3 positive, C-/baa1 stable8), Malayan Banking Bhd (A3 positive, C/a3 stable) and Hong Leong Bank Bhd (A3 positive, C-/baa1 stable) would better withstand unexpected losses owing to their higher capital buffers, although this assessment does not consider the relative riskiness of their loan books, which the central bank's stress test did take into account.
Below is the credit outlook issued by Moody's:
On March 19, Bank Negara Malaysia, Malaysia's central bank, published the results of its stress test of the country's banks, which showed that banks are well capitalised to withstand a scenario worse than the 2008-09 global financial crisis. The results of the stress test are credit positive for Malaysian banks because they show the banks are resilient to severe credit and market losses.
According to Bank Negara Malaysia's adverse stress test, the aggregate total capital ratio of Malaysia's banks would be 10% under the central bank's adverse stress scenario, while their common equity Tier 1 (CET1) ratio would be 7%.
The central bank's scenario includes severe loss assumptions such as up to a six-fold increase in probability of default to around 11.6% versus current impaired loan ratios, a 330-basis-point increase in yields on government bonds and a severe drop in real estate prices of up to 30%.
As of Sept 30, 2013, our rated Malaysian commercial banks had an average CET1 ratio of 9.5%, way above Malaysia's Basel III minimum requirement of 4.0% for 2014.
Banks such as HSBC Bank Malaysia Bhd (A3 positive, C-/baa1 stable8), Malayan Banking Bhd (A3 positive, C/a3 stable) and Hong Leong Bank Bhd (A3 positive, C-/baa1 stable) would better withstand unexpected losses owing to their higher capital buffers, although this assessment does not consider the relative riskiness of their loan books, which the central bank's stress test did take into account.
Bank Negara Malaysia's stress test results are consistent with our own stress test and support our stable outlook on Malaysian banks.
Under our adverse scenario, the aggregate total capital ratio for Malaysian banks fell to around 12.5% from 14.4% as of the end of December 2013, while the CET1 ratio decreased to 10.3% from 12.1% over the same period.
Under our scenario, we assume an average probability of default of 8% and a loss-given default of 40% for business loans and up to 100% for consumers' loans over six quarters.
Malaysian banks' capitalisation is particularly sound in the context of their low impaired loans ratio, which was a stable 1.8% at 31 January 2014 and fully covered by reserves. 
However, as in other ASEAN markets, Malaysian banks' asset quality is vulnerable to a shift in interest rates and the negative effect of higher rates on borrowers.
The leverage of Malaysian households is a particular risk: at 87% of GDP at the end of 2013, it was the highest among ASEAN countries. However, based on Bank Negara Malaysia's and our stress test results, Malaysian banks have enough capital to withstand significantly higher default rates and price corrections.
We note that Bank Negara Malaysia's stress test, while credible, spans a three-year period, whereas there is a risk that a downside scenario could unfold more quickly, causing bank balance sheet problems to materialise faster.
This would result in banks having to absorb credit costs more quickly and without the benefit of a longer stress test horizon, which takes into account higher retained earnings generated by the banks.
For example, the recent stress test by the US Federal Reserve had a two-year horizon, while our scenario for Malaysia usually looks 1.5 years ahead.

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