BNM’s deposit reserve cut seen as mildly positive for banks

By Ranjit Singh

In a surprise move, Bank Negara Malaysia (BNM) slashed its Statutory Reserve Requirement (SRR) ratio by 50 basis points from 3.5% to 3% effective Nov 16.

Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias tells FocusM that banks’ lending activities had slowed down since hitting its cyclical peak in 2018.

The central bank’s move to cut SRR is seen as a shot in the arm for the banking sector as it provides additional liquidity for their lending activities.

The SRR is an instrument to manage liquidity. Banking institutions are required to maintain balances in their Statutory Reserve Accounts equivalent to a certain proportion of their eligible liabilities – this proportion being the SRR rate at no interest.

The SRR may be raised to manage the significant build-up of liquidity, which may result in financial imbalances and create risks to financial stability. Conversely, BNM may lower the SRR if necessary to support the transmission of monetary policy rates to retail rates.

However, it is important to note that changes to the SRR should not be construed as a signal on the stance of monetary policy, where the Overnight Policy Rate (OPR) is the sole indicator.

Nor Zahidi Alias

“I think there is a slight concern over banks’ lending activities lately because lending growth has been moderating since hitting its cyclical peak in November 2018.

“The latest statistics show that loan growth is now slightly below 4% on a year-on-year basis. And against the backdrop of global economic uncertainties, there is a need to ensure that domestic economic activities can be supported so that we can produce a respectable headline growth.

“An injection of extra liquidity would be helpful. Hopefully, this can result in higher lending by banks.

“In addition, stiff competition among banks has also added some pressure on their cost of funds; hence, a reduction in SRR could, hopefully, help ease the situation a bit.

“Moreover, if the policy rate (OPR) is adjusted instead, it would generally put pressure on banks’ net interest margin, something which is negative for the banking sector at this juncture,” says Nor Zahidi.

United Overseas Bank (Malaysia) Bhd (UOB) expects that RM7.4 bil of liquidity would be released into the banking system following BNM’s move to reduce the SRR.

This comprises RM4.7 bil at commercial banks, RM2.6 bil at Islamic banks and RM106 mil at investment banks.

UOB said year-to-date, excess liquidity in the banking system (less SRR) has declined by RM16.8 bil to RM119.4 bil as at end-September versus RM136.2 bil as at end-2018.

“Banks’ cost of funds and base rate (BR) are expected to adjust lower in tandem with the SRR reduction,” it said in a research note.

Currently, the commercial banks’ weighted BR is at 3.68%.

UOB says the banking system loan growth has moderated to a record low of 3.8% in September from 7.7% as at end-2018.

However, it says the loan-to-deposit ratio held steady at 88.4% in September as compared to 88.3% as at end-2018.

UOB added that the SRR cut, the first reduction since January 2016, also comes amid moderation in domestic liquidity as broad money supply (M3) growth eases.

The research house says M3 growth declined to 3.9% year-on-year in September, the lowest level in two years, partly due to a decline in net foreign assets which fell RM24.5 bil in the August-September period.

“The SRR move followed swiftly after foreign portfolio flows recorded cumulative outflows of RM4.6 bil in January-October 2019 mainly due to larger outflows from domestic equities,” it says.

Prof Nazari Ismail of University Malaya says BNM’s move may be myopic if the economy takes a turn for the worse. He tells FocusM that if lending activities by the banks increased with the excess liquidity, borrowers might find it difficult to service the loans if there is a pull-back in the economy.

“Obviously BNM is concerned in case the economy is slowing down. To counter that, BNM is trying to ensure banks will be able to increase lending. But any increase in lending will increase the vulnerability of the economy, because if the economy really slows down despite the increase in lending, it will result in increased bankruptcies,” he says.

Meanwhile, AmInvestment Bank in a separate note said the SRR cut, coupled with the recent decision by BNM to maintain the OPR at 3% on Nov 5 and the signal of a rate pause in the US Federal Reserve, has put less pressure on central banks regionally to further reduce rates.

It says that banks’ current net interest margins (NIMs) are under pressure due to the 25-basis-point cut in OPR in May 2019. The investment bank expects NIMs to normalise as deposit rates reprice after BNM stayed on rates in its latest Monetary Policy Committee meeting.

These have improved the sentiment on banking stocks with more buying interest seen lately.

The investment bank has maintained an “Overweight” recommendation on the sector premised on undemanding valuations and attractive dividend yields due to the low share prices.

BNM’s decision to lower the SRR threshold is a net positive for the Malaysian banking sector which is bracing against moderating loan growth and tighter interest margins following BNM’s OPR reduction in May. The SRR cut is seen as timely to ease some of the pressure the banking sector is facing.

BNM’s decision to maintain the OPR last week was a relief for banks, as there were growing expectations that the central bank would utilise monetary easing to stimulate the domestic economy amid an uncertain external front.

The central bank is expected to undertake one rate cut in 2020, but that will depend on the state of the economy going forward.

Excluding development banks, there are 54 licensed financial institutions in Malaysia today, comprising 26 commercial banks, 17 Islamic banks (one of which is international) and 11 investment banks.


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