Malaysia banks forge ahead with merger plans despite steeper capital rules

Banks can handle the surcharge as CET1 ratios of big lenders range from 12-15.5% in 2018.

The proposed additional capital requirements for domestic systemically important banks (DSIBs) in Malaysia are unlikely to deter mid-size bank consolidation, according to a report from Fitch Ratings, as banks already enjoy strong capital positions even with the planned surcharge that will eat away at their reserves.

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Malaysia is planning to increase surcharge for domestic systematically important banks (DSIBs) of 0.5-1% of risk-weighted assets as part of the Basel III capital framework.  

In comparison to its ASEAN peers, however, Malaysia's planned buffer is lower. In Indonesia, the capital surcharge range is at 1-2.5%; Philippines at 1.5-2.5% and Singapore at 2%.

"We do not expect Malaysia's additional DSIB requirements to materially affect banks' capital targets. The major banks already meet the higher proposed requirements comfortably and we believe many banks have made some allowance for them in their capital planning, as the DSIB framework has been widely anticipated," Elaine Koh, analyst said in a report. 

The common equity Tier 1 ratios of the top-six banking groups in Malaysia ranged between 12.0% and 15.5% at end-2018, well above the 7.5% to 8.0% Pillar 1 minimum that they would need to meet, including the proposed capital surcharge for DSIBs.

As such, the new requirements are unlikely to deter industry consolidation especially amongst mid-sized banks, which may be designated as smaller DSIBs and should stand to benefit the most from consolidation through franchise and cost-efficiency gains. 

Koh adds that consolidation among the top two or three players, however, could result in the merged entity incurring a higher DSIB surcharge of 2.0% of risk-weighted assets or more. The central bank has said that it may impose higher DSIB surcharges to discourage larger DSIBs from further increasing their systemic importance.