by RUPINDER SINGH / pic TMR FILE
BANK Negara Malaysia (BNM) could soon tighten the Statutory Reserve Requirement (SRR) for banks as the risks from the Covid-19 pandemic have subsided and the country’s economy is on a stronger footing for growth.
CIMB-CGS Securities Sdn Bhd (CIMB-CGS Research) said the potential tightening of the SRR requirement would be detrimental to banks as they will have to place a higher amount of funds with BNM as statutory deposits, which are interest free.
“This would negatively impact banks’ net interest margins and lower their net interest income,” the research house said in a note today.
To recap, the central bank relaxed the SRR from 3% to 2% at the onset of the Covid-19 pandemic on March 19, 2020, in a bid to ensure banks had sufficient liquidity to weather the crisis. Banks benefited from this as it reduced the funds tied up in statutory reserves (deposits), which are interest free in nature.
Should the SRR be tightened, CIMB-CGS Research estimated that banks would have to top up their statutory reserves by RM39.4 billion.
“Applying a yield of 3% on this, the loss of income would be RM1.18 billion for banks,” it said.
Based on the above, the research firm estimated that the SRR tightening would trim banks’ net profits by 3.2%.
The impact, it noted, would be the smallest at 2.3% for Malayan Banking Bhd (Maybank) as about 25% of its revenue is generated from overseas markets, which will not be impacted by the SRR tightening in Malaysia.
Conversely, it said the impact would be largest at an estimated 8.4% for Affin Bank Bhd due to the low base of its existing statutory reserve.
It also said that the SRR tightening would also reduce banks’ net interest margins by an estimated 5.9 basis point but said this should be more than offset by the positive impact from the series of Overnight Policy Rate (OPR) hikes.
Should the SRR be tightened, CIMB-CGS Research believes that banks will be able to top up their statutory reserves given their strong liquidity positions.
It noted that in financial year 2021 (FY21), banks’ liquidity coverage ratios, the key barometer for liquidity, ranged between 135.6% and 180.1%, which were significantly higher than the minimum requirement of 100%.
CIMB-CGS Research reaffirmed its ‘Overweight’ stance on banks predicated on potential rerating catalysts of a swift core net profit (CNP) growth of 20.5% projected for 2023 and the expansion in net interest margin amidst the upcycle for OPR.
Its top picks for the sector are Hong Leong Bank Bhd, RHB Bank Bhd and Public Bank Bhd.