In their Financial Stability Review for 2H 2022, BNM said that whilst the valuations rose in the second half of 2022 (2H 2022), there was still a significant downside risk that was affecting investor confidence.

Price-to-book (P/B) and price-to-earnings ratios (P/E) – both measures of banks’ market valuations – trended higher in 2H 2022, at 0.9 and 12.2 respectively. This was compared to 0.8 and 11.0 in June 2022.

Despite the encouraging signs, BNM said that these figures have not fully recovered to pre-pandemic levels. The 2015-2019 averages for P/B and P/E were 1.1 and 11.5 respectively.

Notwithstanding the increased global volatility and investor concerns in 2H 2022, BNM said that trading and investment income did provide some support to banks’ profits.

This was supported by the active risk management decisions and modest recovery in market optimism following the Federal Reserve’s slowdown in the pace of interest rate tightening.

BNM also cautioned that banks were now exposed to higher interest rate risks due to their increased holdings of government bonds since the start of the pandemic.

As of Dec 2022, government bonds made up 9.9% of total bank assets, noticeably higher than the 2015-2019 average of 6.8%.

However, the larger share of bank assets made up by government bonds (recorded as amortised assets) has reduced fluctuations in banks’ capital positions, which BNM noted was beneficial in the current environment of sustained high interest rates.

Banks’ high capital buffers will also continue to preserve their ability to absorb any realised mark-to-market losses from this portfolio.