(Jan 17): Malaysian Financial Reporting Standard (MFRS) 9 Financial Instruments: Recognition and Measurement, which replaces MFRS 139, will take effect on 1 January 2018. With the aim of addressing a key concern that had arisen during the global financial crisis, i.e. that credit losses are recorded too late in the economic cycle, this new accounting standard will introduce a new impairment model based on expected credit losses, thereby bringing forward the recognition of credit losses.
To better gauge the banking industry’s readiness with respect to MFRS 9, RAM Ratings conducted a survey in July-October 2016 among 20 financial institutions in Malaysia. This survey aims to identify the common potential challenges and practical issues (including the availability of technical expertise and historical data, as well as the interpretation of MFRS 9) that will be faced by the Malaysian banking industry, along with the effects arising from the implementation of MFRS 9.
“We view the introduction of MFRS 9 as a prudent move, as it will accelerate the recognition of credit losses. While we have yet to observe the full impact of this standard on individual banks or the industry as a whole, we believe that this new approach will prompt banks to adopt a more risk-based approach in executing their business strategies. Banks’ loan-pricing strategies are also likely to be affected, given the expected heftier provisioning and additional costs related to MFRS 9,” notes Sophia Lee, Co-Head of Financial Institution Ratings.
Most banks in Malaysia are expected to have adequate levels of capital or regulatory reserves (if allowed) to absorb the impact of higher loan-loss allowances. Banks have also been prudent in recent years, as reflected by the industry’s healthy asset quality. As at end-November 2016, the system’s gross impaired-loan (GIL) ratio stood at a commendable 1.6%, while its GIL coverage ratio remained at a comfortable 91.1%. As such, RAM expects most of the domestic banks to be able to manage the impacts of MFRS 9 adoption.