Investment Highlights

• Bank Negara Malaysia (BNM) announced last Friday the reduction in the statutory reserve requirement (SRR) ratio to 3.00% from 3.50%. The previous reduction in SRR ratio by 50bps to 3.50% was carried out on 1 Feb 2016.

• The lowering of the SRR ratio to 3.00% is effective 16 November 2019.

• Based on the total eligible liabilities of commercial, Islamic and investment banks of RM1.48tril, a 50bps reduction in the SRR ratio will release circa RM7.4bil of liquidity into the market.

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

• The increase in liquidity in the market is expected to lower the funding cost for banks. In turn, this will have a mild positive impact on banks’ net interest income.

• Based on our analysis, the lowering of the SRR ratio by 50bps will raise banks’ net profit slightly by 0.6% to 1.1% (see Exhibit 2).

• Presently, NIMs of banks are under pressure due to the recent OPR cut of 25bps on May 2019. We expect banks’ NIM to normalise in 4QCY19 as deposit reprices after the OPR reduction with the OPR kept unchanged at 3.00% in the recent MPC meeting on 5 November. The reduction in the SRR ratio by 50bps should further ease the pressure on banks’ NIMs. Overall, we expect a gradual recovery in the interest income and NIMs of banks barring another rate cut by 25bps in 2020 which we see a low likelihood of it occurring for now.

• We believe that the reduction in the SRR ratio, the recent decision by BNM to maintain the OPR at 3.00%, 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 on banking stocks with more buying interest seen lately.

• We maintain OVERWEIGHT on the sector premised on appealing valuations and dividend yields due to the low share prices. Our top picks remain RHB (FV: RM6.50/share) and Maybank (FV: RM9.80/share).

Source: AmInvest Research - 11 Nov 2019