Malaysia banks told to set minimum CA ratio at 1.2% of total loans
PETALING JAYA: Banks have been told to have a minimum collective
assessment (CA) ratio of 1.2% by the end of next year, sending a strong
signal to the industry to improve its standards of prudence.
According to a circular from
Bank Negara
to financial institutions early last week, all banks are required to
set aside a minimum of 1.2% of total loans effective Dec 31, 2015.
The requirement, effectively, will put a stop to the present situation
where banks are left to set aside their CA ratio based on their own risk
assessment of their asset profile.
“Most banks have maintained a CA ratio of lower than 1.2% because there is no minimum set by
Bank Negara. This circular effectively sets the standard for a minimum requirement,” said a banker.
The CA ratio was previously known as the general provisions that all
banks were required to adopt. The general provisions requirement was a
minimum of 1.5% of total loans, a ratio set by the central bank.
However, after the introduction of the new accounting standards three
years ago, the general provisions requirement was replaced with a CA
ratio, with banks free to set their own ratio.
The central bank no longer set the minimum requirement for banks to comply with in regards to the provisions.
According to a research report by CIMB, banks that had a CA ratio of less than 1.2% as of September last year were
Malayan Banking Bhd,
Public Bank Bhd,
Affin Bank Bhd and
Alliance Bank Malaysia Bhd.
Bankers, when contacted, were divided on the impact that the requirement would have on their bottom lines.
According to one banker, the move to comply with the ruling will not
impact profitability because the additional amount required to be set
aside can be transferred from retained earnings.
“Funds out of
retained earnings will not impact the profit and loss (P&L) account
of banks. It’s not a P&L item,” he said.
However, it would affect the dividend payout ability of banks, added the banker.
Another banker said the financial institution was seeking clarification from
Bank Negara on whether to set aside the provisions from its profits.
“If that were the case, then it would impact profitability,” said the banker.
OCBC Bank (M) Bhd country chief risk officer
Choo Yee Kwan said the background to the new requirement was that
Bank Negara wanted to ensure that impairment provisions could keep pace with strong credit growth.
“In addition, the regulator would like to promote consistency in
practices in ensuring adequate rigour and data quality in arriving at
the appropriate level of collective impairment and the factors that are
considered by banking institutions.
“Adequate impairment
provisions serve as necessary buffers against potential credit losses;
hence, they can reduce the likelihood of systemic risk for the banking
sector,” he said in an e-mail response to
StarBiz.
He said the sector might witness an increase in the overall level of impairment provisions at the industry level.
“Nevertheless, this should be seen positively, as the higher credit buffers would now render the sector stronger,” he noted.
CIMB Research in a report stated that the proposed new guideline could have a negative impact on banks based on its theoretical analysis.
It pointed out that several banks would have to increase their CA
provisions under the new ruling and this would lead to a rise in the
banks’ overall credit costs.
“Those which do not meet the
requirements would have to increase their CA (and ultimately credit
cost) in 2014-2015, even if their asset quality is improving. For banks
with a CA ratio of above 1.2%, the new ruling would limit the room for
them to further reduce their CA ratios,”
CIMB Research explained.
According to
CIMB Research’s estimates, banks’ net profits could be lowered by around 0.5% (for
Hong Leong Bank Bhd) to 11% (for Public Bank) in 2014 to 2015 if a minimum requirement of 1.2% for the CA ratio were implemented.
Another analyst, however, is of the view that the new requirement from
Bank Negara would have a negligible impact on the operations and earnings of banks.
“We think it is not a major concern for most banks because, firstly,
the grace period for the implementation of the new guideline is long.
Secondly, the minimum ratio of 1.2% will not comprise of only the CA
component alone, but is also a combination of the CA and the statutory
or regulatory reserve.
“In general, we see the new guideline as a measure to standardise the way banks gauged their capital buffers.
“The bottom line is, we think the new guideline will only serve to
further strengthen banks’ capital buffers,” the analyst added.
By Cecilia Kok and Daljit Dhesi StarBiz, Asia News Network
Silver lining in weak currency
Weaker currencies are a boon for Malaysia and
Indonesia, helping to tip the balance of trade back in their favour, as
exporters benefit from rising demand for goods and commodities from
advanced economies, coupled with steady growth in China.
The favourable trade surplus, economists said, would ease the pressure
on these emerging countries’ deteriorating external accounts, which is a
major sore point for foreign investors.
They added that rising exports would provide the much-needed tailwind
for Asian economies to sustain growth even as domestic demand moderated.
Malaysia on Friday reported a 2.4% growth in exports in 2013, backed by a
14.4% jump in December that exceeded the market’s expectation by a wide
margin.
“We still maintain our long-term view of impending growth momentum in
the coming quarters,” Alliance Research economists Manokaran Mottain and
Khairul Anwar Md Nor said in a report.
They predicted exports in 2014 to grow at a faster pace of 5%, backed by
steady but improving export demand from advanced economies.
While imports grew at a faster pace than exports in 2013, Malaysia continued to enjoy a strong trade surplus.
The favourable trade surplus combined with an anticipated smaller
services deficit and transfer outflows would translate into a larger
current account surplus of RM16.7bil or 6.6% of gross domestic product
(GDP) in the last quarter of 2013.
“The cumulative current account surplus is estimated to reach RM37.8bil
or 3.9% of GDP in 2013, helping to assuage fears of a current account
deficit,’’ CIMB Research economist Lee Heng Guie said.
This, he said, was positive for the ringgit and the capital market.
The ringgit, along with other emerging Asian currencies, have been under
pressure since June last year after the US Federal Reserve began
talking and later started to reduce its quantitative easing (QE).
The US Fed first pared its monthly bond purchases programme from the
original US$85 billion a month to $75 billion in January. This was cut
further by $10 billion starting from February.
“Capital outflows from emerging markets are likely to continue in the
months ahead as the Federal Reserve winds down its QE3 programme,” said
Macquarie Bank Ltd’s Singapore-based head of strategy for fixed income
and currencies Nizam Idris.
Fears about the US Fed tapering down the supply of cheap money to the
market first surfaced in May last year and it triggered a huge sell-off
on emerging market assets.
Countries such as Indonesia and India had seen their currencies
depreciate the most in 2013, Both economies had wide current account
deficits.
Last year, the Indian rupee plummeted the most in two decades, while
rupiah depreciated by about 20% against the US dollar over the past 12
months.
Not helping emerging market currencies is the recovery in advanced
economies, such as a rebound in economic growth in the US which rose by
3.2% in the fourth quarter of last year.
But if economic recovery in the US and eurozone were to stay on course,
so would demand for cheaper emerging market exports. This, in turn,
would help shrink the huge current account deficits that had hobbled
countries such as Indonesia, India and Turkey.
For many emerging economies, 2014 had gotten off to a grim start.
Concern over the Chinese economy’s marked slowdown and the Argentine
peso’s steep slide in January has brought upon renewed pressure on the
currency market.
But the current market volatility does not portend weaker growth.
CIMB Research in Indonesia observed that the strains in the financial
markets did not translate into a significant slowdown in the economy as
the country’s real GDP growth accelerated to 5.7% in the last quarter of
2013.
Its exports surged in December, while imports slowed on the weaker
rupiah. This helped to widen its trade surplus to $1.52 billion, the
largest since November 2011.
The favourable trade numbers narrowed its current account deficit of $4.06 billion.
CIMB Research expects growth in Indonesia “to trough” in the first half
of 2014 as the lagged effect of the rupiah depreciation and Bank
Indonesia’s aggressive policy-tightening cycle in June-November 2013
works through the economy.
“Pre-election bounce in consumption should offset the weakness, allowing Indonesia to post 5.6% GDP growth in 2014,’’ it said.
Malaysia, too, is on track for sustained growth. CIMB Research projected
GDP growth in the third quarter would probably expand by 5.3%, taking
the full year growth rate to 4.7% for 2013. - The Star/ANN
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