Investment Highlights

• Bank Negara Malaysia (BNM) announced a further reduction in the statutory reserve requirement (SRR) ratio by 100bps from 3.00% to 2.00%. This follows the cut in the SRR by 50bps in Nov 2019.

• The lowering of the SRR ratio to 2.00% is effective today, 20 March 2020.

• Based on the total eligible liabilities of commercial, Islamic and investment banks of RM1.49tril as of Jan 2020, a 50bps reduction in the SRR ratio will release a circa RM7.5bil of liquidity into the market. With a 100bps decline in the ratio, this will translate into RM15bil of liquidity into the banking system.

• This announcement was not surprising given that BNM has reduced the SRR by 300bps to 1.0% back in the 2008– 2009 financial crisis.

• The decrease in the ratio could either lower the funding cost for banks or improve the interest income marginally for banks. It will only have a mild positive impact of less than 2% on the earnings of banks.

• Besides the decline in the SRR ratio, BNM also announced another measure to boost liquidity. The central bank has given the flexibility to principal dealers until 31 Mar 2021, to recognise MGS and Malaysian government investment issues (MGII) as part of the dealers’ SRR compliance.

• Combined, both measures will release a circa RM30bil into the banking system.

• The decrease in the SRR is seen more as a tool to manage liquidity as there has been selling of MGS recently which has caused the yields to rise. The 10-year MGS yield has risen to 3.62% from a low of 2.78% on 6 Mar 2020.

• We maintain NEUTRAL on the sector premised on headwinds to interest income from potentially further rate cuts and higher credit cost from external (Covid-19, lower oil prices) and domestic political uncertainties. Our top picks remain Maybank (FV: RM8.60/share), RHB Bank (FV: RM5.80/share). We also like Hong Leong Bank (FV: RM15.90/share) for its strong security coverage for loans, low foreign shareholdings of 10.7%, faster recovery from OPR cuts and its valuation which is now trading at a low 0.8x FY21 PB/V.

Source: AmInvest Research - 20 Mar 2020