Less than 25 per cent of Malaysian banking assets sit in bonds. At Silicon Valley Bank, more than 50 per cent did. That gap is the center of an assessment RAM Rating Services Bhd put out on March 17, 2023, concluding that the collapse of SVB and two smaller U.S. lenders changes nothing in the ratings of Malaysian banks.
The agency said Malaysian credit fundamentals are holding up, backed by firm regulatory supervision. “Compared to SVB, we see fundamental differences in the business and balance sheet profiles of commercial banks in Malaysia,” RAM Ratings said in its statement.
Lending versus bonds
In plain terms, Malaysian banks make their money mostly by lending. They do not lean on bond holdings, which swing with the market. SVB did, and when U.S. interest rates rose fast and steeply, its bond portfolio lost a great deal of value on paper.
How those bonds are booked matters too. Across Malaysia’s eight major banks, less than 40 per cent of bond holdings, on average, are classed as held to maturity. The rest are marked to market, so fair value losses have largely flowed into the banks’ capital already. SVB had put almost 80 per cent of its bonds in the held-to-maturity bucket and only a little over 20 per cent at market value. Its unrealised losses were not yet showing in equity.
Held-to-maturity bonds are carried at amortised cost because the owner intends to keep them until they mature, RAM Ratings explained. Fair valuation losses therefore never touch capital.
Gentler rate rises, sturdier funding
Malaysian banks also took smaller hits. RAM Ratings credited Bank Negara Malaysia’s milder pace of rate increases, along with a recent habit among the banks of buying shorter-tenure bonds. Any further valuation losses should be milder still, the agency said, given the central bank’s cautious stance on more hikes.
The banking industry’s common equity tier-1 capital ratio was 14.9 per cent at the end of 2022, compared with 15.5 per cent in 2021.
Funding looks different as well. Customer deposits pay for most of what Malaysian banks do, and those deposits are spread across many small accounts. Liquid assets come to around 20 per cent of deposits, and the net loans to deposits ratio is 88 per cent.
No direct exposure
Bank Negara Malaysia said domestic banks have no direct exposure to the three failed American lenders. The central bank pointed to its prudential oversight and its record through earlier financial crises as the basis for continued stability in the Malaysian system, according to the Bernama report.
Sources
Sources
- Malaysian banks rating intact despite US bank failures – RAM…
- thestar.com.my/business/business-news/2023/03/17/malaysian-banks…
