Front Matter Page

INTERNATIONAL MONETARY FUND

IMF Country Report No. 14/98

April 2014

MALAYSIA

FINANCIAL SECTOR ASSESSMENT PROGRAM

FINANCIAL SECTOR PERFORMANCE, VULNERABILITIES AND DERIVATIVES—TECHNICAL NOTE

This Technical Note on Financial Sector performance, Vulnerabilities and Derivatives on Malaysia was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed in February 2013.

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Front Matter Page

Financial Sector Assessment Program

Malaysia

Financial Sector Performance, Vulnerabilities And Derivatives

Technical Note

February 2013

International Monetary Fund

Monetary and Capital Markets Department

Contents

• Glossary

• Executive Summary

• I. Structure of Malaysia’s Financial Sector

• II. Performance of Malaysia’s Banking Sector

  • A. Capital

  • B. Asset Allocation and Quality

  • C. Liquidity

  • D. Earnings Efficiency

• III. Financial Derivatives

• References

• Tables

• 1. Non-bank Credit Intermediaries

• 2. Residential Mortgage Asset Quality Under Various Scenarios

• Figures

• 1. Malaysia’s Financial Sector

• 2. Banking Sector: Assets and Deposits

• 3. Funds Raised in the Capital Market

• 4. Herfindahl Index for Banking Sector

• 5. Shareholding by Government-linked Institutions

• 6. Institutional Funds

• 7. Spreads Between 3-month Interbank and T-Bills Rates

• 8. Banking System Excess Liquidity and Deposit-to-Total Liabilities Ratio

• 9. European and U.K. Banks’ Claims on Malaysia

• 10. Share of U.K. Banks’ Claims in Total European Banks’ Claims

• 11. Regulatory Capital to Risk-Weighted Assets

• 12. Tier 1 Ratio

• 13. Capital-to-Total Assets Ratio

• 14. Hybrids as Proportion of Total Regulatory Capital

• 15. Tier 2 Capital as Proportion of Total Capital

• 17. Domestic Banking Groups: Tier 1 Ratios

• 18. Domestic Banking Groups: Core Tier 1 Ratios

• 19. Composition of Bank Lending

• 20. Breakdown of Banking System Loans

• 21. Breakdown of Lending to Households

• 22. Gross NPL Ratios

• 23. Provision Coverage

• 24. Loans Under Restructuring

• 25. Regional Comparison: Gross NPL Ratio and Provision Coverage

• 26. Composition of Non-performing Loans

• 27. Household Debt, Income

• 28. Unsecured Lending: Commercial and Islamic Banks

• 29. Residential Mortgage: Lending and NPL

• 30. Trends in the Number of Counseling and Debt Management Cases

• 31. Breakdown of Exposure to Large Borrowers

• 32. Banks’ Lending to Highly Leverage Companies

• 33. Banks’ Lending to Highly Leverage Companies

• 34. Construction Sector Gross NPL Ratios

• 35. Malaysian Banks: Composition of Overseas Exposure in Asia

• 36. Liquid Assets-to-Deposits and Short-Term Funding

• 37. Customer Deposit-to-Total Funding

• 38. Proportion of CASA and Term Deposits

• 39. Banking System Deposit by Holders

• 40. ROA and ROE

• 41. Efficiency Measures

• 42. Return on Average Asset (ROAA)

• 43. Overhead Cost-to-Revenue Ratio

• 44. Share of Floating Rate Loans to Total Loans

• 45. Net Interest Margin

• 46. Breakdown of Derivatives

• 47. Breakdown of FX Derivatives

• 48. Breakdown of Interest Rate Derivatives

• 49. Derivatives Exposures

• 50. Contribution of Net Gains from Derivatives to Pre-Tax Profit

• 51. Spread between NDF-Onshore USD/MYR Forward

• 52. Cross Currency Basis Swap Spreads

• 53. Weekly Change in Cross Currency Basis Swap Spreads

• 54. Cross Currency Swap Basis Spreads and Domestic Excess Liquidity

• Boxes

• 1. Malaysia’s Masterplan for the Development of the Financial Sector and Capital Market, 2001-2010

• 2. Financial System Interlinkages, 2011

• 3. Do large Malaysian Banks Have Adequate Capital and Liquidity to Absorb European Banks’ Deleveraging?

• 4. How Much Equity Do Banks Need to Promote Growth and Meet Basel III?

• 5. Late Credit Cycle

• 6. Assessing Efficiency Among Commercial and Islamic Banks: An Application of Data Envelopment Analysis

• Appendices

• 1. Malaysia’s Financial System

• 2. Islamic Banking in Malaysia

• 3. Data Envelopment Analysis (DEA) Methodology

Glossary

Executive Summary

Strong regulatory oversight, coupled with efforts to restructure the banking sector in the aftermath of the Asian financial crisis in 1997–1998, has supported rapid growth in Malaysia’s financial sector over the last decade.¹ The banking sector has undergone consolidation while competition has increased following measures implemented under the Financial Sector Master Plan 2001–2010. The financial system weathered the 2008 global financial crisis well; the banking sector remained stable due to healthy capital and liquidity levels, while the impact on the domestic economy was felt primarily through trade channels.

Malaysian banks are presently well capitalized with comfortable tier 1 capital ratios. Domestic banking groups are expected to be able to meet Basel Ill capital requirements, barring any unforeseen tail-risk scenarios. Although the full implementation of Basel Ill only begins in 2019, maintaining high equity capital buffers should enhance stability and enables hybrid capital to be retired when they reach maturity or call dates.

Asset quality has been improving over the last five years. There has been a significant growth in lending to the household sector, driven by sustained economic growth. Personal loans and credit card lending have been growing rapidly, alongside mortgages. Lending to households currently accounts for 55 percent of total bank lending and household debt has risen to 74.2 percent of GDP in 2011, from 66.3 percent of GDP in 2006. While this may not be an immediate concern, potential risks could arise if a global economic downturn adversely affects the labor market and leads to strains in household balance sheets. Nonetheless, BNM, in its Financial Stability and Payments Systems Report 2011, assessed household financial buffers to be at comfortable levels as the growth in household debt has generally been accompanied by a corresponding expansion in household financial assets. The central bank remains vigilant in conducting continuous risk assessment.

Stronger financial positions and risk management capability have enabled domestic banking groups to pursue overseas expansions, mostly within the region. The importance to some banks of overseas assets and earnings is reaching levels which, based on international experience, warrant a review of internal controls. Currently, BNM monitors developments at material overseas operations of banks on a monthly basis and conducts frequent onsite examination on key material overseas outfit.