KUALA LUMPUR (March 6): PAS central economic, real estate and entrepreneur development committee vice-chairman Mazli Noor has urged for the consideration of a merger of banks to address liquidity concerns in the nation’s financial system.

In a statement yesterday, he said that a merger is “inevitable” and that it is a much needed move given the current situation, urging industry players to act fast.

Mazli said the party’s recommendation follows Bank Negara Malaysia's (BNM) decision to cut the overnight policy rate (OPR) by 25 basis points to 2.5%, the lowest level in 10 years, which it said was part of a series of capital controls employed, which also includes the reduction in the statutory reserve requirement (SRR) to 3%.

“Analysts expect this situation to have an impact on net interest margins and earnings of the banking sector," he said, adding that some analysts are expecting the banking sector’s margins to see contraction of between 2% and 3%, which will then affect their earnings by 1% to 2%.

While Mazli agreed that the lower OPR will translate to lower borrowing costs for consumers, he said this has had other effects, especially the decline in the loan to deposit ratio, which he said stood at 87.6% as at January 2019.

He said this has forced banks to compete for deposits, which will affect their earnings.

Given the tight liquidity environment, a merger, he said, is the most optimum way to save the banking industry and to protect consumers.

“With an enlarged size, the banks will have better economies of scale to continue competing. The government has to facilitate this by initiating talks between the banks, suggest on business matching and by giving relevant incentives.

“Governance is also important as in any integration or business merger, good governance is a main factor for success,” he said.

Mazli also urged banks in Malaysia to expand regionally, following in the footsteps of Malayan Banking Bhd, CIMB Group Holdings Bhd and Public Bank Bhd, as the banks would be able to take advantage of an enlarged market which could improve their cash flows.

However, he added that this would only be effective in the event that a merger of the banks is completed.