PETALING JAYA: Banks have been told to have a minimum collective assessment (CA) ratio of 1.2% by the end of next year, sending a strong signal to the industry to improve its standards of prudence.
According to a circular from Bank Negara to financial institutions early last week, all banks are required to set aside a minimum of 1.2% of total loans effective Dec 31, 2015.
The requirement, effectively, will put a stop to the present situation where banks are left to set aside their CA ratio based on their own risk assessment of their asset profile.
“Most banks have maintained a CA ratio of lower than 1.2% because there is no minimum set by Bank Negara. This circular effectively sets the standard for a minimum requirement,” said a banker.
The CA ratio was previously known as the general provisions that all banks were required to adopt. The general provisions requirement was a minimum of 1.5% of total loans, a ratio set by the central bank.
However, after the introduction of the new accounting standards three years ago, the general provisions requirement was replaced with a CA ratio, with banks free to set their own ratio.
The central bank no longer set the minimum requirement for banks to comply with in regards to the provisions.
Bankers, when contacted, were divided on the impact that the requirement would have on their bottom lines.
According to one banker, the move to comply with the ruling will not impact profitability because the additional amount required to be set aside can be transferred from retained earnings.
“Funds out of retained earnings will not impact the profit and loss (P&L) account of banks. It’s not a P&L item,” he said.
However, it would affect the dividend payout ability of banks, added the banker.
Another banker said the financial institution was seeking clarification from Bank Negara on whether to set aside the provisions from its profits.
“If that were the case, then it would impact profitability,” said the banker.
OCBC Bank (M) Bhd country chief risk officer Choo Yee Kwan said the background to the new requirement was that Bank Negara wanted to ensure that impairment provisions could keep pace with strong credit growth.
“In addition, the regulator would like to promote consistency in practices in ensuring adequate rigour and data quality in arriving at the appropriate level of collective impairment and the factors that are considered by banking institutions.
“Adequate impairment provisions serve as necessary buffers against potential credit losses; hence, they can reduce the likelihood of systemic risk for the banking sector,” he said in an e-mail response to StarBiz.
He said the sector might witness an increase in the overall level of impairment provisions at the industry level.
“Nevertheless, this should be seen positively, as the higher credit buffers would now render the sector stronger,” he noted.
CIMB Research in a report stated that the proposed new guideline could have a negative impact on banks based on its theoretical analysis.
It pointed out that several banks would have to increase their CA provisions under the new ruling and this would lead to a rise in the banks’ overall credit costs.
“Those which do not meet the requirements would have to increase their CA (and ultimately credit cost) in 2014-2015, even if their asset quality is improving. For banks with a CA ratio of above 1.2%, the new ruling would limit the room for them to further reduce their CA ratios,” CIMB Research explained.
According to CIMB Research’s estimates, banks’ net profits could be lowered by around 0.5% (for Hong Leong Bank Bhd) to 11% (for Public Bank) in 2014 to 2015 if a minimum requirement of 1.2% for the CA ratio were implemented.
Another analyst, however, is of the view that the new requirement from Bank Negara would have a negligible impact on the operations and earnings of banks.
“We think it is not a major concern for most banks because, firstly, the grace period for the implementation of the new guideline is long. Secondly, the minimum ratio of 1.2% will not comprise of only the CA component alone, but is also a combination of the CA and the statutory or regulatory reserve.
“In general, we see the new guideline as a measure to standardise the way banks gauged their capital buffers.
“The bottom line is, we think the new guideline will only serve to further strengthen banks’ capital buffers,” the analyst added.By Cecilia Kok & Daljit Dhesi Source: TheStar Published On: Tuesday, February 11, 2014