Boon for banks as BNM slashes SRR by 50bps

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This move is an immediate boon for banks, as the 0.5 percentage point cut to the SRR will invariably reduce funding costs for banks. — Reuters photo

KUCHING: Economists laud the move by Bank Negara Malaysia to reduce the statutory reserve requirement (SRR) from 3.5 per cent to 3, effective November 16, 2019 onwards, to ensure sufficient liquidity in the domestic financial system.

To note, banking institutions in Malaysia are required to maintain balances in their Statutory Reserve Accounts (SRA) equivalent to a certain proportion of their eligible liabilities – this proportion being the SRR rate.

The last time BNM cut the SRR was back in February 2016 when the central bank cut the ratio to 3.5 from 4 per cent.

Kenanga Investment Bank Bhd (Kenanga Research) said the latest decision is “obviously to address tightened liquidity conditions in the domestic market due to capital outflows especially in the equity market.”

“Foreign investors remained as net sellers in the equity market for four straight months, albeit marginally smaller outflow in October,” it opined in a note yesterday.

“This comes as Malaysia’s overall capital market – including the debt market – saw a net outflow of RM1 billion in October amid heightened concerns on emerging economies’ growth, lower commodity prices especially crude oil, and the prolonged US-China trade war uncertainty.

“Year-to-date, total net capital outflow reached RM4.8 billion against RM33.6 billion in 2018.”

This move is an immediate boon for banks, Kenanga Research highlighted, as the 0.5 percentage point cut to the SRR will invariably reduce funding costs for banks.

“We see this benefitting banks with above-sector-average loans-to-deposit ratio (LDR) and tight current and savings accounts – namely AmBank Bhd, BIMB Holdings Bhd and MBSB Bank Bhdm relative to the industry LDR of 93 per cent – as these non-income generating liquidity released from reserves can now be lent out by banks in meeting loan demand.

“Costs of funds should stabilise and net interest margins (NIMs) to recover, should credit demand turned upwards given the accommodative interest rate environment ahead.”

AmInvestment Bank Bhd (AmInvestment Bank) saw that presently, NIMs of banks are under pressure due to the cut of the Overnight Policy Rate (OPR) of 25bps in May this year.

“The reduction in the SRR ratio by 50bps should further ease the pressure on banks’ NIMs,” it added.

“Overall, we expect a gradual recovery in the interest income and NIMs of banks barring another rate cut by 25bps in 2020 which we see a low likelihood of it occurring for now.

“We believe that the reduction in the SRR ratio, the recent decision by BNM to maintain the OPR at three per cent (in November), coupled with the signal of a rate pause in the US Federal Reserve which put lesser pressure on central banks regionally to further reduce rates, have improved the sentiment on banking stocks with more buying interest seen lately.”

Looking ahead, Affin Hwang Investment Bank Bhd (AffinHwang Capital) believe that the banking sector outlook continues to remain muted due to the prevailing cautious business and consumer sentiment – shrouded with fears of global recession and prolonged trade worries.

“Nonetheless, the cut in SRR ratio overall is marginally positive for the banks’ earnings through additional lending activities or investments.

“We maintain our sector neutral call, noting that the sector lacks domestic catalysts while earnings growth remain unexcited.”