Maybank, CIMB and Public Bank have been identified by BNM as D-SIBs in its inaugural list on Wednesday, which analysts say is a step in the right direction towards the industry’s resilience.
KUCHING: Malayan Banking Bhd (Maybank), CIMB Group Bhd (CIMB) and Public Bank Bhd (Public Bank) have been identified by Bank Negara Malaysia (BNM) as Domestic Systemically Important Banks (D-SIB) in its inaugural list on Wednesday, which analysts say is a step in the right direction towards the industry’s resilience.
MIDF Amanah Investment Bank Bhd (MIDF Research) said being classified as a D-SIB requires a bank to maintain higher capital buffers to meet regulatory capital requirements that include a Higher Loss Absorbency (HLA) requirement.
This will increase a D-SIB’s capacity to absorb losses.
“D-SIBs are banks which are well tied to the economy and the financial system. As such, its distress or failure has the potential to cause considerable disruption to the stability of the domestic financial system and the wider economy.
“Thus, it will ensure that the bank will be able to reduce its probability of distress or failure during periods of stress,” it said yesterday, adding that the higher capital requirements introduced will complement the regulatory framework in place.
“In turn, this will ensure a more resilient Malaysian financial system. Although the additional capital requirements suggest that D-SIB would have to increase its capital, nevertheless we should note that all of the listed D-SIB are already been met.”
While in its opinion the D-SIB does not have to increase its capital further, MIDF Research recognised the fact that the exiting high capital is a weight to return on equity (ROE).
However, the other consequence in the increased capital is the reduction of risk relating to the solvency of the banks in general.
“While it is understood that there is only a few good alternative to ROE as a measure for banks, we must be cognisant that this metric does not factor risk sufficiently.
“We believe that it needs to be considered with valuation as a whole and other factor such as asset quality, liquidity and asset growth should be evaluated together with ROE.
“We opine that this is the new normal environment that banks have to operate in. However, we must be aware that this equity is far less risky than what it was before.”
MIDF Research viewed that banking stocks in general are relatively undervalued as the majority of the banks are trading below its three-year historical average.
“We believe that the recent price weakness is mostly sentiment driven associated by the n-cov outbreak. The fact that the banks comply to even the additional D-SIB requirements suggest that banks will be able to withstand any major shocks. The banks have thus far managed to navigate the headwinds the sector faced and we believe will continue to do so.
“Based on the ability of banks in general to navigate the headwinds it faced, we are cautiously optimistic and maintain our positive stance at the moment.”
In a more modest opinion, Affin Hwang Investment Bank Bhd maintained its neutral call on the banking sector.
“We believe that the sector implication is minimal and that these D-SIBs do not have to resort to raise additional equity capital at current levels,” it said in a separate note.
“Nonetheless, the ability of these D-SIBs to pay higher dividends could potentially be constrained by this requirement. But that said, any approvals come from BNM and also depends on the ability of these D-SIBs to generate higher profitability.
“We maintain our neutral sector call, noting that earnings catalysts are lacking while loan growth may moderate further to three per cent in 2020 due to lacklustre business and consumer sentiment.”