Thursday 28 Mar 2024
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KUALA LUMPUR (March 20): Bank Negara Malaysia’s (BNM) announcement of a cut in the statutory reserve requirement (SRR) rate is seen as positive for banks, although concerns over earnings remain, following the previous cuts in the overnight policy rate (OPR) as well as expectations of another interest rate cut this year.

In a note today, CGS CIMB Research analyst Winson Ng estimated that the 100-basis-point reduction in the SRR to 2% would release RM14.8 billion into the banking system, which translates into 0.8% of total system loans, which stood at RM1.77 trillion as at end-January.

“We understand that banks do not earn any interest from the statutory reserve maintained with the central bank. Hence, the partial release of this would benefit banks as these funds can be invested/lent out to generate additional income for banks,” he wrote.

He estimated that the reduction in the ratio would enhance banks’ net profit by 1.1% for financial years 2020 (FY20) and 2021 (FY21), with the impact to be bigger for smaller banks, which have almost all of their assets based in Malaysia.

On the other hand, the impact would be less significant for bigger banks, such as Malayan Banking Bhd (Maybank), as it has only 0.8% of its assets in the country, based on the projection that 43% of its total loans in FY20 would be expanded outside of Malaysia.

The cut in the SRR will also improve the banks’ net interest margin (NIM) due to the additional interest income generated from the freed funds, although it will be “miniscule” at 1.6 basis points, Ng said.

“Despite the positive impact from the SRR cut, we retain our ‘neutral’ call on banks due to concerns over the margin erosion from the cuts in the OPR and potential rise in loan loss provisioning. 

“However, we deem banks’ 2020 dividend yield of 6.3% to be attractive,” he said, adding that the research house’s picks for the sector are RHB Bank Bhd and Public Bank Bhd.

Meanwhile, TA Securities analyst Wong Li Hsia maintained an “underweight” recommendation for the sector as she does not foresee the reduction in the SRR to spur loans growth.

“Instead, we continue to foresee more downside risks in earnings, as top-line growth remains affected by overall weak sentiments and rising macro turmoil and concerns over weakening oil prices. We also foresee rising asset quality risks due to a confluence of negative factors,” she said.

The research house had reduced NIM assumptions as it expects a further 50bps cut in the OPR this year, which may translate into a 5.1% reduction in sector earnings.

Wong expects the banking sector’s earnings to contract 7.3% in 2020 before improving 6.9% and 7.7% in 2021 and 2022 respectively.

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