What provisions will trend post-MFRS 9 implementation?

Malaysian banks adopted the new standard on January 1, 2018.

Under Malaysian Financial Reporting Standards 9 (MFRS 9), Malaysian banks which categorise loans under Stage 2 (under-performing) and Stage 3 (non-performing) will require provisions to account for ‘lifetime expected credit losses’ (lifetime of the loan), whilst loans classified under Stage 1 (performing loans) will make provisions under the assumption of projected losses over a 12-month period.

DBS Equity research reports that all these will be subjected to economic volatility, as macroeconomic assumptions will be imputed in the banks’ internal models to determine the expected economic scenario the bank is expected to operate in.

Here’s more from DBS Equity Research:

If macro factors remain positive, we believe credit costs would not deviate too much from the current levels – this is our base-case assumption currently. Note that the basic indicator which will likely be used as a benchmark would be GDP growth. Malaysia’s GDP growth official projection by BNM ranges at 5.2-5.7% in 2017, and 5.0-5.5% in 2018.

We believe the real test for the banks under the MFRS9 regime would be a recessionary scenario. Then, banks will need to stress their books to evaluate the proportion of loans moving from Stage 1 to Stage 2 with the corresponding higher provisions as well as a stressed scenario for lifetime provisioning for their existing Stage 2 and Stage 3 loans.