This article first appeared in The Edge Malaysia Weekly on October 29, 2018 - November 4, 2018

THE pressure on banks to chase retail deposits is expected to ease now that Bank Negara Malaysia has delayed implementation of the net stable funding ratio (NSFR).

The central bank announced last Tuesday that it wants to extend the observation period on the NSFR for another year, until 2020. It did not provide a new date for implementation.

NSFR, a key liquidity measure under Basel III rules that lenders worldwide have to adopt, requires banks to prioritise long-term stable funding. Banks will be required to have a minimum NSFR — the ratio of their available stable funding to their required stable funding — of 100% on an ongoing basis.

One of the key ways for banks to boost long-term stable funding is to pursue more retail deposits.

Recall that Malaysian banks competed aggressively for deposits in the first half of this year, particularly in the second quarter. For some, this was to raise their NSFR level ahead of the expected Jan 1, 2019 adoption deadline.

While such competition is good for consumers — it drives up deposit rates and results in a more attractive savings rate — it has negative consequences for banks as it raises their funding cost and takes a toll on margins.

This was evident in the second quarter of this year. The banking sector’s net interest margin (NIM) — the difference between the interest a bank earns on loans and what it pays out to depositors — declined by 14 basis points year on year and 5bps quarter on quarter.

“We had expected the interest rate hike in January this year to help banks register an expansion in NIM in 2Q2018 due to the positive upward repricing gap between lending and deposit rates. Ironically, banks’ NIM contracted ... primarily due to the higher cost of funds arising from stiff competition for deposits,” CIMB Research says in a report on the sector last month.

Malayan Banking Bhd had seen the largest q-o-q contraction in NIM, by 12bps to 2.27% as it shored up deposits in Malaysia to build liquidity, followed by Public Bank Bhd (9bps to 2.24%) and CIMB Group Holdings Bhd (9bps to 2.48%). Only RHB Bank Bhd and BIMB Holdings Bhd bucked the trend.

After their 2Q2018 financial results, several banks, including Public Bank and Maybank, guided that their NIM for the full year would likely come in lower than the previous year due to higher funding cost.

However, with the delay in NSFR adoption, analysts think the near-term outlook for NIM may not be as gloomy. “NIM for the banking sector this year could probably turn out to be flat y-o-y, as opposed to our earlier expectation of a possible decline,” banking analyst Kelvin Ong of AmInvestment Bank Research tells The Edge.

Generally, he expects the intense competition for deposits among banks to ease with the NSFR delay. But, he points out that banks with relatively high loan growth targets and that need to build up liquidity, or have yet to meet the NSFR of 100%, may continue to intensely pursue deposits.

In Malaysia, Affin Bank Bhd is currently the only one of the eight banking groups with the NSFR below 100%. “We are moving towards 100% by 2019,” the bank tells The Edge. Bank Islam Malaysia Bhd, which fell slightly short as at 2Q2018, is understood to already exceed 100% now.

Development financial institutions are not required to comply with the NSFR. 

Globally, banks were generally expected to adopt NSFR by Jan 1, 2018. However, as at March 31, only 10 jurisdictions worldwide had done so, according to the latest progress report by the Basel Committee on Banking Supervision in April. They are Australia, Singapore, Hong Kong, Indonesia, South Korea, Russia, Brazil, Argentina, Saudi Arabia and South Africa.

Notably, none of the major economies — including the US, China, Japan and the European Union — have adopted it yet. Most, however, are in the process of getting there.

The US Federal Reserve, for example, was reported in April to be “close” to finalising the NSFR, a development that upset the American Bankers Association, which argues that the standard would impose needless costs considering that the NSFR’s goals have been achieved through other liquidity measures.

Bank Negara said last Tuesday that its intention to extend the observation period for the NSFR takes into account its plan to “conduct further on-site assessments to validate the maturity and robustness of the liquidity and funding practices of banks, and uneven progress in implementation at the global level.”

It noted that at present, the “vast majority” of banks already report NSFR levels above the minimum 100% based on observation data. 

“That the NSFR deadline (in Malaysia) has been shifted is not a surprise, for Bank Negara had already indicated in earlier meetings that it was in no rush to implement this guideline and that there is no systemic risk to banks from delaying compliance. The central bank would rather focus on strengthening the integrity of the data that banks have been submitting for the NSFR computation instead,” says Maybank Investment Bank Research in an Oct 24 report.

The NSFR complements the Basel Committee’s other liquidity measure — the liquidity coverage ratio (LCR) — which measures a bank’s ability to survive a significant stress scenario lasting 30 days. The LCR from Malaysian banks stood at 139.3% as 1H2018, well above the required minimum of 100%.

The NSFR, aimed at ensuring banks can survive in an extended period of stress, was deemed necessary after several major international banks suffered a liquidity crisis during the 2007/08 global financial crisis due to their over-reliance on short-term funding.

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