- The press reported that Singapore has announced new liquidity requirements as part of its measures to make the local banking system more resilient.

- Singapore’s Minister of Trade and Industry unveiled Monetary Authority of Singapore’s (MAS) new liquidity framework to ensure that banks hold sufficient high-quality and liquid assets to match their total net cash outflows over a 30-day period.

- The new liquidity framework also extends to non-Singapore dollar liabilities to better reflect the business operations of banks based here.

- Banks that are not domestic systematically important banks (D-SIBs) may elect to comply with the new liquidity coverage ratio or choose to remain under the current system.

- Singapore said that while there could be cost efficiencies in managing liquidity centrally at the group level, there can be significant obstacles to the free movement of liquidity across borders during a stress scenario. Foreign banks operating in Singapore will be required to maintain some liquid assets in Singapore to support local liquidity needs.

- OUR TAKE: The new requirements would lead to further pressure on net interest margin (NIM), given that banks may be required to hold liquid assets with a lower yield (cash, government securities) compared to for example loans, under the liquidity coverage ratio (LCR) requirements.

- Note that, simplistically, the formula for LCR is liquid assets over net cash outflows over a 30-day period. Net cash outflows include assumptions on deposit run-offs. A higher runoff rate of 40% is assigned to wholesale deposits compared to 10% for retail deposits. Malaysia requires a minimum LCR of 60%; banks are required to start reporting LCR by 2015.

- Malaysian banks which have operations in Singapore, and which may be affected, are Maybank, CIMB, HLBB, and RHB Cap. The largest is of course Maybank. That said, the ruling is not new, and is required under BASEL 3 rules. Thus, share prices may not react negatively to this news.

- Still, on an overall basis, this is not good news for the banks, and reinforces our view of further pressure on NIM.

- We expect the banks’ share prices to remain flat, with ongoing concerns not only on capital, but also on earnings due to a NIM squeeze, and possible increase in impaired loans following a possible rate hike in July.

- We maintain NEUTRAL on the sector.

Source: AmeSecurities