- The press reported that banks may see some easing in the requirement to build up their retail deposit base under some changes to the Liquidity Coverage Ratio (LCR) requirements. LCR is computed by taking high-quality liquid assets (HLQA) over total net cash outflow over the next 30 calendar days. The press said the changes by the central bank were intended to facilitate a smooth transition to full implementation of the liquidity coverage ratio by 2019.

 - It was reported that deposits which are subject to an early withdrawal penalty of at least 50% of accrued interest can be treated as qualifying term fund, effective 1 June 2015. The rule on deposits will be tightened in 2019, with only those subject to early withdrawal penalties of 100% allowed as qualifying term funding in 2019.

 - The press also reported that unrestricted investment accounts, which hold assets such as securities and exchange-traded commodities, will be subject to a 10% run-off rate effective from the same date. In addition, it was reported that non-ringgit denominated corporate bonds that have been assigned an A rating will be recognised as high-quality liquid assets subject to losses of 50%, effective from 1 June 2015.

 - Other than these, the press also highlighted that the statutory reserve requirement (SRR) balances may now be included in the calculation of LCR.

 - While banks do not disclose the current LCR, all the banks indicated that the minimum required LCR ratio of 60% has been achieved.

 - We believe the most significant change is the inclusion of the statutory reserve requirement (SRR) balances, in the HLQA balance. Assuming all the banks are registering the minimum required LCR ratio of 60% currently, ceteris paribus, we estimate that the inclusion of the SRR may lead to LCR ratio being moved up from 60%, to 63%-67% for the banks.

 - The move is positive as it reduces the escalating pressure on retail deposits. As an indication, the fixed deposit campaign rates have increased by around 40bps in the past three months since December 2014, to 4.20% from 3.80%. Our checks with the industry indicate that this is partly due to efforts to comply with the LCR requirement, which will be increased from a minimum of 60% effective 1 June 2015, to 70% effective 1 January 2016, 80% effective 1 January 2017, 90% effective 1 January 2018 and 100% effective 1 January 2019.

 - The latest news is positive as there is lesser chance of earnings downgrade from higher-than-expected cost of funds. We maintain NEUTRAL.

Source: AmeSecurities