This article first appeared in The Edge Financial Daily on November 12, 2019

Banking sector
Maintain overweight: Bank Negara Malaysia (BNM) announced last Friday the reduction in the statutory reserve requirement (SRR) ratio to 3% from 3.5%. The previous reduction in the SRR ratio by 50 basis points (bps) to 3.5% was on Feb 1, 2016.

The lowering of the SRR ratio to 3% is effective Saturday. Based on the total eligible liabilities of commercial, Islamic and investment banks of RM1.48 trillion, a 50bps reduction in the SRR ratio will release about RM7.4 billion of liquidity into the market.

Even though the central bank highlighted that the reduction in the ratio was to ensure sufficient liquidity in the domestic financial system, we were surprised by the move given that the loan-to-deposit ratio for the sector was only 88.5%.

The increase in liquidity in the market is expected to lower funding costs for banks. In turn, this will have a mild positive impact on net interest incomes of banks. Based on our analysis, the lowering of the SRR ratio by 50bps will raise the banks’ net profits slightly by 0.6% to 1.1%.

Presently, net interest margins (NIMs) of banks are under pressure due to the recent overnight policy rate (OPR) cut of 25bps in May this year. We expect banks’ NIMs to normalise in the fourth quarter of calendar year 2019 as deposit reprices after the OPR reduction with the OPR kept unchanged at 3% in the recent monetary policy committee meeting last Tuesday. The reduction in the SRR ratio by 50bps should further ease the pressure on banks’ NIMs.

We believe that the reduction in the SRR ratio, the recent decision by BNM to maintain the OPR at 3%, coupled with the signal of a rate pause in the US Federal Reserve which put lesser pressure on central banks regionally to further reduce rates, have improved the sentiment for banking stocks with more buying interest seen lately.

We maintain “overweight” on the sector premised on appealing valuations and dividend yields due to low share prices. Our top picks remain RHB Bank Bhd (fair value [FV]: RM6.50/share) and Malayan Banking Bhd (FV: RM9.80/share). — AmInvestment Bank, Nov 11