‘No cause for concerns over new liquidity metrics’

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BNM recently introduced two new liquidity metrics which are loan-to-fund ratio, and loan-to-fund-and-equity ratio as alternative ratios to counter check on the commonly used loan-to-deposit ratio.

BNM recently introduced two new liquidity metrics which are loan-to-fund ratio, and loan-to-fund-and-equity ratio as alternative ratios to counter check on the commonly used loan-to-deposit ratio.

KUCHING: Analysts remain unconcerned over Bank Negara Malaysia (BNM) introducing new liquidity metrics.

BNM recently introduced two new liquidity metrics which are loan-to-fund ratio, and loan-to-fund-and-equity ratio as alternative ratios to counter check on the commonly used loan-to-deposit ratio.

The metrics parameters include debt instruments, shares, retained earnings plus deposits. The two new ratios resulted in lower ratios than the loan-to-deposit ratio indicating that there is ample of liquidity in the system and the underlying liquidity is not as constrained as negatively perceived.

Kenanga Investment Bank Bhd (Kenanga Resarch) said with ample liquidity, there will be less pressure for banks to intensify deposit-taking activities and less upward pressure on deposit rates as banks are able to finance their earnings assets via debt instruments as well.

“Thus, net interest margins (NIMs) will likely be stabilised or even improved for small banks,” it said in the report.

“All things considered, we still view the sector as neutral. While the view of constraint in liquidity might change with the new definitions, we maintained our view that structural and cyclical headwinds such as a moderating economy, muted loans growth, weak capital market activities, and higher credit costs, continue to plague the banking industry.

“Furthermore, there are no concrete catalysts and/or any game changer going forward.”

In this new metrics, loans are defined as loans excluding financing funded by Islamic Investment Accounts, fund is defined as deposits plus all debt instruments and equity comprising shares and retained earnings.

BNM previously viewed that the current practice of using the LDR is not a suitable indicator for assessing liquidity as it does not take into account the ‘diversity present in the banks funding structure’.

“Deposits have been the staple funding of the banking system but ‘banks have gradually broadened their funding sources by raising funds in the capital market’. This can be seen by several capital raising exercise and issuance of debt securities as the banks strengthened their Capital Ratios which as at December 2015 stood at 16.1 per cent versus Basel III requirements of eight per cent.

In its 4Q15 report, BNM stated that ‘banks have increasingly tapped the deeper domestic capital markets to maintain a stable funding profile through issuances of medium term funding instruments’.

The report also added that, ‘as at end of 2015, banking system placements and reverse repos, which can be unwound to meet liquidity needs, were in excess of RM100 billion, preserving comfortable buffers against comfortable buffers against unexpected cash outflow or adverse liquidity shocks.

Kenanga Research said this move comes as the banking system is experiencing liquidity constraint and the banks are feeling the strain. Loans deposit ratio (LDR) in the banking industry has been trending up since October 2013 where it surpassed the 80 per cent barrier mark, reaching 86 per cent in December 2015.

“The upward trend is attributed to loans growth outpacing deposits growth where loans growth for December 20 15 was at 7.9 per cent year on year compared to deposits growth of 1.8 per cent y-o-y.

“The high LDR could limit loans growth and put downward pressure on margins.”

NIM has compressed by 13 basis points (bps) from Sepember 2013 to 2.3 per cent in September 2015 as banks competed for deposits with better and higher deposit rates.

“Meanwhile, overzealous compliance to the Basel III regulations of the liquidity coverage ratio pushed banks to shore up deposits more aggressively than before.

“The industry liquidity coverage as of December 2015 ratio stood at more than 100 per cent against the Basel III regulated 60 per cent.”