By G. Sharmila
Analysts appeared “neutral” on the Malaysian banking sector following Bank Negara Malaysia’s (BNM) announcement yesterday that it will reduce the statutory reserve requirement (SRR) ratio by 50 basis points (bps) to 3.5%.
To recap, yesterday BNM kept the overnight policy rate (OPR) at 3.25% but cut the SRR to ensure sufficient liquidity in the banking system. The new SRR ratio will come into effect Feb 1.
Maybank IB Research in a note this morning said that the cut could free up about RM5 billion in liquidity, which is about 0.3% of total banking system deposits.
“The cut could also technically influence the base rate (BR) down by 2 bps, but given that the move is not material, we do not expect BR to change. All in, the impact of this move is neutral on the banking system,” the research house said.
According to Maybank IB, assuming the SRR was cut to the post-Global Financial Crisis low of 1%, this would free up RM30 billion, or 2% of banking system deposits, which again, is not material.
“If this liquidity was invested in 10-year Malaysian Government Securities at 4% (recall that the SRR is included in the computation of the liquidity coverage ratio (LCR), so banks may have to invest the spare funds in high-quality liquid assets), the enhancement to bank earnings would be less than 1%.
“Positively though, the SRR is potentially a tool to manage the risk of rising interbank rates pushing up funding costs, and thus the BR in turn. For illustrative purposes, assuming a BR of 4%, a cut in the SRR to 1% could technically reduce the BR by 11 bps to 3.89%, ceteris paribus,” it added.
TA Securities, which also maintained a “neutral” rating on Malaysian banks, said that while it believes the impact of a decrease in the SRR could prompt stronger domestic lending and give some relief to margin pressures due to competition, it views that the impact will be minimal.
“We estimate that RM19.8 billion (with an estimated multiplier effect of some RM56 billion) will be released into the system – a fraction of the system’s loans and advances of RM1,431 billion,” it said.
The research house noted that banks with higher loan-to-deposit (LD) ratios such as Maybank, AMMB and CIMB would benefit the most from the release of this liquidity, in its view.
“We note that banks with the highest statutory deposit placements with BNM include Maybank, Public Bank and CIMB.
“Note that lower SRR could also translate to a slight reduction in high-quality liquid assets in the calculation of LCR. Banks should also see a reduction in the BR due to lower SRR. Note that under the new framework, BR comprises the SRR and a financial institution’s funding costs. Nevertheless, we believe this would not necessarily translate to lower indicative effective lending rate as other components of the reference rate, such as credit cost has been rising,” it opined.
Commenting on the SRR ratio cut, UOB Kay Hian Research said: “Given the very lacklustre system deposit growth of just 1.6% versus loans growth of 7% coupled with 11-year historical-high system loans-to-deposit ratio (LDR), the cut in the SRR did not come as a surprise.
“In fact we were anticipating a cut as early as the announcement of Budget 2016 back in October 15. The 50-bp cut in SRR is expected to release close to RM5 billion in additional liquidity for loans growth purposes.
“Although the reduction in the SRR should help to ease nett interest margin (NIM) pressure by raising interest income by freeing up excess liquidity to boost loans growth, the positive impact on earnings is expected to be marginal, ranging from 0.4% to 0.6% for every 50-bp reduction in SRR.
In spite of the SRR cut helping to alleviate some NIM pressure on banks, UOB Kay Hian said it thinks that the effect will be marginal and not sufficient to address: near record-high LDR, sharp structural slowdown in overall deposit growth which continues to lag loans growth by a very wide margin, and rising credit cost from deteriorating asset quality outlook.
It added that the cut is unlikely to have a sustainable impact in fully addressing slow structural deposit growth. “As the current level of SRR of 4.0% (before recent cut) pales in comparison to the peak of 13.5% before the Asian Financial Crisis, we think that scope to meaningfully alleviate the ongoing funding cost pressure and moderating loans growth outlook from near record-high system LDR will remain modest even with further SRR cuts.”
The research house highlighted that the total system statutory reserve residing with BNM as at January 16 stood at RM40 billion.
“As such, a 50-bp cut is only expected to release roughly RM5 billion in additional liquidity to drive loans growth, representing only 0.3% of existing system loans base. As long as the overall system deposit growth remains at the current subdued run rate of 2% versus loans growth of 6% to 7%, we believe that overall competition for deposits will remain intense leading to a combination of persistent NIM pressure and slowing loans growth outlook.
“The current annual shortfall gap between loans growth and deposit growth is currently hovering at RM74 billion per annum. This coupled with near record-high system LDR of 90% will likely keep competition for deposits intense with a moderating loans growth outlook.
“In fact many of the larger banks’ LDR are currently hovering at above 90% compared with the average 78% LDR levels in 2009 when the SRR was first reduced drastically from 4% to 1% within the span of three months during the Global Financial Crisis,” it opined.
The research house maintained its “market weight” rating on local banks with Maybank as its top pick within the sector.
“We believe that it could be among the key beneficiary of ValueCap’s imminent capital injection into the market given its undemanding valuations, above-industry return on equity and dividend yield coupled with its heavy index weighting. We also like RHB Cap given its undemanding valuations and commendable earnings recovery,” it said.
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