New financial reporting standards will not materially impact Malaysian bank assets: Moody's

MFRS 9 actually represent strengthened credit practices due to higher provision requirements.

The adoption of new accounting standards for financial instruments, Malaysian Financial Reporting Standard 9 (MFRS 9), will not result result in significant changes to the country’s banking sector as the underlying economics of assets will remain unchanged, according to Moody’s Investors Service. 

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MFRS 9 actually represents a strengthening in credit practices because it takes a more proactive stance on requiring higher provisions on underperforming assets, said Moody’s vice president and senior analyst Simon Chen. It also gives banks an incentive to undertake better credit monitoring practices to pre-empt unwarranted credit migration.

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"Because we expect credit conditions in the Malaysian banking system to remain benign over the next 12-18 months, provisioning expenses under MFRS 9 will have only a limited effect on subsequent period earnings amongst Malaysian banks," added Chen.

Here’s more from Moody’s:

The new reporting standards introduces the concept of expected credit losses (ECLs) as the basis for provisioning on all financial asset holdings. Under the reporting standard, all financial assets will count toward the computation of ECLs and therefore require provisioning from the first day of their origination, even if they are fully performing.

MFRS 9 treats assets that are performing, but with increased credit risks, as underperforming assets and subjects them to higher ECLs. The regulatory minimum level of loss allowances under MFRS 9, and regulatory reserves now covers a broader pool of assets than the previous requirement, and hence attracts higher provisions.

Moody's says that the Day 1 adjustment to Common Equity Tier 1 (CET1) ratios will be manageable for the banks, although it will affect capital ratios because the application of ECL on a broader coverage of financial assets will result in loss allowances that are in most cases larger than banks' reserves under FRS 139.

Initial estimates from the six banks that Moody's rates in Malaysia indicate a 0-80 basis point decline in CET1 ratios on Day 1 of MFRS 9 adoption. However, some banks have indicated that the fair value treatment of non-loan financial assets under MFRS 9 could result in valuation gains and partly offset higher loss allowances.