Investment Highlights

• BNM held an analyst briefing to provide updates on net stable funding ratio (NSFR), a component of Basel III regulatory reforms. The objective of NSFR is to ensure that banks have sufficient amount of stable funding to fund various assets and off-balance sheet items on an ongoing basis and ensure resilience in the long term.

                    Available amount of stable funding

• NSFR = ____________________________ ≥ 100%

                    Required amount of stable funding

• Internationally, NSFR was widely expected to be implemented on 1 January 2018. However, BNM has now delayed it to no earlier than 1 January 2019 for implementation. We view this as positive as it will ease some pressure in the near term on competition for longer tenure deposits by allowing banks more time to raise their NSFR, particularly those below 100%. This could lower the pressure that is expected on banks' funding cost ahead.

• We understand that the implementation of NSFR is still not confirmed in Japan, the Philippines, Thailand and China. Meanwhile, it has also been delayed in Canada, the EU and US.

• BNM has also issued an exposure draft to solicit feedback on its proposals for NSFR and we understand that the guidelines are expected to the finalised by the end of 2017.

• As at end- June 2017, the industry has an average NSFR of 107.0% which is above the minimum regulatory requirement of 100.0%. We understand that more than 75.0% of banks have NSFR exceeding 100.0%. In 1Q2017 and 2Q2017, the industry average NSFR has climbed as banks positioned themselves towards meeting the regulatory requirement.

• Meanwhile, the industry's liquidity coverage ratio (LCR) is healthy with an average of 141.0%, well above the minimum requirement of 100.0%. On a comforting note, all banks have LCRs of more than 100.0%. The industry's LCR ratio has been rising in 1Q2017 and 2Q2017, contributed by banks' take-up of MGS disposed by nonresidents.

• Banks have sufficient liquid assets and have diversified funding profiles with long-term borrowings in addition to customer deposits. As at June 2017, the banking system has an LD ratio of 89.3% while loan-to-fund ratio (LTF) and loan-to-fund and equity (LTFE) ratio stood at 83.3% and 73.5% respectively.

• Maintain OVERWEIGHT on the sector with an expected improvement in the sector's core earnings growth to 6.4%YoY in 2017 from a flat earnings growth in 2016. This is anticipated to be contributed by a pickup in noninterest income from stronger capital market activities and lower provisions. Our stock picks remain RHB Bank (Fair Value: RM6.00/share) and Public Bank (Fair Value: RM22.20/share).

Source: AmInvest Research - 29 Sept 2017