This article first appeared in The Edge Financial Daily on August 15, 2017

Banking sector
Maintain neutral: In our banking sector report dated Aug 7, 2017, we excluded investment accounts (IAs) from our loan-deposit (LD) ratio calculations for the individual banks as IAs could be partly utilised to fund non-debt financial instruments. However, after clarification with the banks, we gathered that almost all of the existing IAs are used to fund loans. Hence, we deem it appropriate to include IAs in the calculation and analysis of the banks’ LD ratios.

Among the Malaysian banks that we cover, Malayan Banking Bhd (Maybank) and Bank Islam Malaysia Bhd (BIMB) had large IAs as at end-March 2017 of RM31.7 billion and RM3.7 billion respectively, accounting for 6.6% and 8.5% of their total deposits (excluding IAs). Apart from Maybank and BIMB, our checks revealed that the IA value of the Malaysian banks under our coverage was not significant as a percentage of total deposits.

We gathered that all of Maybank’s IAs are used to fund loans. As such, we believe that IAs should be included in our LD ratio calculation for the bank. Taking IAs into consideration, our revised LD ratio as at end-March 2017 for the Maybank group was 93.1%. This was lower than the 99.2% (excluding IAs) quoted in our August sector report.

Another way to assess a bank’s liquidity position is the liquidity coverage ratio (LCR). The LCR is calculated by dividing the value of high-quality, liquid assets by the total net cash outflow over the next 30 days. Maybank’s LCR was 134% as at end-March 2017, above Bank Negara Malaysia’s minimum requirement of 80% and the industry’s LCR of 131%. Its high LCR is an indication of Maybank’s strong liquidity, in our view.

After taking IAs into consideration, our revised LD ratio for BIMB stood at 84.7% as at end-March 2017. This was lower than the 91.9% estimate (excluding IAs) in our August sector report.

Our LD revisions have no impact on our financial year 2017 (FY17) to FY19 earnings per share estimates, target prices or ratings. We continue to rate the Malaysian banking sector as “neutral”, given the expected negative impact from the adoption of Malaysian Financial Reporting Standard 9. Upside risks to our call are better-than-expected loan and fee income growth, while a downside risk is significant deterioration in asset quality. — CIMB Research, Aug 14