Is SRR cut a prelude to OPR reduction?

As Bank Negara has left the OPR unchanged at 3% in its recent meeting which came in line with our expectation, the 50bps reduction in the statutory reserve requirement (SRR) was a surprise move. The SRR cut is expected to provide some relief to banks in terms of better liquidity management and positive for loan growth and economic activities.

However, the positive impact on the overall economic activities will depend much on the demand for credit. At the moment, there is no clear evidence of a meaningful pick-up in loan growth this year. Loans have been growing at a decreasing rate. And of concern is the rising gross impaired loans.

Should the effectiveness of the 50bps reduction in the SRR fail to meet the stipulated targets as we move ahead, then there is room for an OPR cut in 22 January 2020 by 25bps from the current 3.00%. The probability for a rate cut in January 22 is now at a low 40% with room to be raised to 70%.

• Bank Negara Malaysia’s (BNM) decision to lower the statutory reserve requirement (SRR) ratio from 3.5% to 3% effective 16 Nov came as a surprise. This comes following the recent decision on the overnight policy rate that was kept unchanged at 3.00%.

• The last time BNM reduced the SRR was in February 2016 when the central bank cut the ratio to 3.5% from 4%. It was followed by an OPR cut by 25bps to 3.00% in 13 July 2016.

• With the 50bps SRR cut, the amount of liquidity that will be injected amounts to RM7.4bil. With the additional release of liquidity, banks can now increase their lending which in turn is expected to stimulate domestic economic activities.

• However, the positive impact on the overall economic activities will depend much on the demand for credit. At the moment, there is no clear evidence of a meaningful pick-up in loans growth this year. Loans have been growing at a decreasing rate. The pace of growth in September was 3.8% y/y, slower by more than half of that reported in September 2018 which was 7.8% y/y and end-2018 at 7.7%. The drag on loan growth came from both business and household segments.

• Meanwhile, the cut in SRR can be seen as mildly positive for banks. With more liquidity in the market, the cost of funds for banks could also be lower, easing pressure on banks’ margins (NIMs).

• The lowering of the SRR could translate to a slight reduction in high-quality liquid assets in the calculation of liquidity coverage ratio. Banks should also see a reduction in the base rate due to the lower SRR. Under the new framework, base rate comprises the SRR and a financial institution’s funding costs.

Source: AmInvest Research - 11 Nov 2019