SRR cut a near-term positive for banks, NIM pressure

The lower SRR threshold is estimated to free up about RM7.4b in cash across domestic banking system


THE recent reduction of the statutory reserve requirement (SRR) by 0.5% to 3% is expected to be a nearterm positive for banks and ease net interest margin (NIM) pressure, said analysts.

Bank Negara Malaysia (BNM) last Friday cut the SRR for the first time in over three years in a move aimed at ensuring sufficient liquidity in the domestic banking system.

Citing industry experts, The Malaysian Reserve reported yesterday that the lower SRR threshold is estimated to free up about RM7.4 billion in cash across the system.

Hong Leong Investment Bank Bhd (HLIB) in a note yesterday also said the 50 basis points (bps) cut in the SRR is expected to provide additional liquidity of RM7.4 billion into the banking system.

The research house, which kept its ‘Neutral’ call on the industry, said the release of reserves would benefit banks, albeit with an estimated impact of circa 1% to 2% (4% yield assumption being employed).

“Although the system loan-todeposit ratio (LDR) stood at a historic high of 89% in September, we do not think liquidity is a major issue considering that deposits growth is printing at a faster pace of 4.2% versus loans expansion of 3.8% year-on-year.

“However, if BNM’s ultimate objective is to spur lending activities, we find that this is not an effective tool given that credit demand has been weak. In any case, we believe the SRR reduction will only help to ease NIM pressure through mitigation of a negative carry effect,” HLIB said.

Separately, Kenanga Research said as the statutory liquidity now stands at RM32 billion, the reduction will release an estimated RM4.6 billion into the banking system, compared to total deposits in the banking system estimated at around RM1.95 trillion.

This will benefit banks with LDR above sector average of 93% and a tight current account savings account — namely AMMB Holdings Bhd (98%), BIMB Holdings Bhd (101%) and MBSB Bank Bhd (117%) — as these non-income generating liquidity released from reserves can now be lent out by banks in meeting loan demand.

“Cost of funds should stabilise and NIM should recover, if credit demand turned upward given the accommodative interest-rate environment ahead,” Kenanga Research said.

The firm, which maintained its ‘Overweight’ call on the sector, said it may see deposit rates on an easing bias with the SRR reduction.

Meanwhile, Maybank Investment Bank Bhd (Maybank IB) said it does not see any evidence of liquidity tightening or stress in the system.

“Unless, this is a pre-emptive move in view of the potential risk in foreign investors’ flows in the bond market,” it wrote in a note yesterday.

The SRR cut is still a form of monetary stimulus to the economy, like what the People’s Bank of China and Bangko Sentral ng Pilipinas did by cutting their much higher banking system’s reserve requirement ratio.

“Despite BNM’s decision on Nov 5 to keep the Overnight Policy Rate (OPR) at 3%, the accompanying monetary pol icy statement remained dovish, hinted at slower third-quarter GDP growth and highlighted downside risks to global and domestic growth.

“The risk of recession will trigger more SRR cuts alongside more aggressive OPR cuts. Our view on BNM monetary policy remains that of another 25bps cut in the OPR next year after the 25bps reduction in May 2019,” Maybank IB said.

Public Investment Bank Bhd said the SRR reduction could be a pre-emptive move to support private consumption activity ahead of the refloating of petrol prices in January which may push consumers to be cautious in spending.

“The release of additional liquidity into the banking sector could also be used to encourage capacity expansion in the private sector amid capital imports that have been weak this year, which if not addressed may result in negative repercussions to macroeconomic momentum in the long run,” it said.

“A normalised SRR is widely seen at 4%. The cut can be considered as a tactical move to support growth amid inflation that has remained lethargic so far.”