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RAM Ratings: SRR reduction to have little impact on bank margins

Published on 12 Nov 2019.

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RAM Ratings is of the view that Bank Negara Malaysia’s (BNM) decision to reduce the statutory reserve requirement (SRR) ratio to 3.0% from 3.5%, effective 16 November 2019, will have only a marginal impact on the net interest margins (NIMs) of banks. As statutory deposits are non-interest-bearing, the redeployment of some of these funds for interest-earning activities such as lending or investing in bonds is margin accretive, all else being equal. Nonetheless, the margin uplift will be very small (~1 bp) as the liquidity released forms less than 0.3% of the banking system’s total assets. NIMs will ultimately depend on the direction of the OPR, among other factors. A potential OPR cut in 2020, which is data-dependent, would cause mild NIM compression if it materialises.

“We note the striking contrast in the backdrop of the latest SRR reduction compared to the last one in February 2016 (from 4.0% to 3.5%). The banking industry’s liquidity is presently healthy, as evidenced by a liquidity coverage ratio of 144% as at end-September 2019 (end-December 2015: 125%). Deposits growth has slightly outpaced lending growth while interbank rates have declined,” Wong Yin Ching, RAM Ratings’ Co-Head of Financial Institution Ratings, said. 

The previous revision in 2016, on the other hand, came on the heels of meagre deposits growth in 2015, which had trailed lending expansion by a significant 5 percentage points. Additionally, aggregate outflows from the equity and bond markets were more manageable in the first 10 months of 2019 at an estimated RM4.6 bil (full-year 2015: RM30.7 bil).

Based on the banking system’s RM51.5 bil of statutory deposits as at end-September 2019, a 50-bp reduction in the SRR ratio will release RM7.4 bil of liquidity on a pro forma basis. “Assuming all the additional liquidity is channelled into lending, the industry’s loans would increase by 0.4 percentage points. However, the key challenge to loan growth is the tepid demand for credit amid muted business and consumer sentiments, and not a lack of liquidity,” Wong says. “Loan growth was only 3.8% y-o-y in September 2019 (2018: +5.6% excluding MBSB Bank Berhad whose figures were incorporated into industry statistics in April 2018). We project full-year loan growth of around 4% for 2019 and 2020,” she adds. Banks will likely use the incremental liquidity to invest in a higher proportion of Malaysian government securities – increasing demand for these and mildly pushing down yields as a result.

The SRR is an instrument to manage liquidity. Should the need arise, BNM has further room to decrease the SRR ratio, which reached a historical low of 1.0% in March 2009, staying at that level until March 2011.

 

Analytical contact
Lim Yu Cheng, CFA, FRM
(603) 3385 2492
yucheng@ram.com.my

Media contact
Padthma Subbiah
(603) 3385 2577
padthma@ram.com.my

 

The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.

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Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.

Published by RAM Rating Services Berhad
© Copyright 2019 by RAM Rating Services Berhad



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