Credit costs to banks could rise to RM29 billion in 2020, 2021 - BNM

Higher household impairments are expected to emerge in the second half of 2021 given the extended repayment assistance programmes that will remain in place through the first quarter of 2021 for individuals who have experienced a loss in income, it said.

“Overall, credit costs to banks could rise to RM29 billion (1.4 per cent of total loans) over 2020 and 2021,” BNM said in its Financial Stability Review -- First Half 2020 released here today.

“These projections assume conservative estimates of the share of loans under bespoke targeted repayment assistance (mainly for businesses) based on restructuring and rescheduling trends observed at the onset of the pandemic. “With uncertain conditions persisting, banks have been much more proactive in extending repayment assistance, as seen in recent months,” said BNM.

Since July, the number of businesses receiving repayment assistance from banks has increased seven-fold.

“In anticipation of higher credit losses, banks have been shoring up their buffers, adding RM2.7 billion to provisions in the first half of 2020.

“At an individual bank level, additional provisions by banks have already risen to an average of 16 per cent of banks’ projected stressed credit losses over a 12-month horizon based on their internal stress tests,” it said the report.

The report provides BNM’s assessment on current and potential risks to financial stability and the resilience of the Malaysian financial system to sustain its financial intermediation role in the economy.

Furthermore, the central bank said, provisions could increase further as banks obtain greater visibility on credit developments based on more informed assessments of borrowers after the end of the blanket moratorium.

“The gradual build-up of provisions will also ensure that banks maintain healthy buffers to absorb losses and support continued lending to the economy,” it said.

Applying a sensitivity analysis to these results, BNM said individual banks are projected to have adequate buffers above the regulatory minimum capital requirement to withstand further losses associated with default rates that are eight times higher than the banks’ historical default rates.

“These multiples are significantly more severe than Malaysia’s historical worst experienced in the Asian Financial Crisis, during which overall impairments rose by three to five times from initial levels,” it said.