KUALA LUMPUR (Feb 8): As the risks from Covid-19 have subsided, Bank Negara Malaysia (BNM) may tighten the statutory reserve requirement (SRR), which, in turn, would drag banks’ earnings prospects, according to CGS-CIMB Research.

Notwithstanding that, the research house has reaffirmed an “overweight” stance on banks, predicated on potential rerating catalysts of a swift core net profit (CNP) growth of 20.5% projected for 2023 and the expansion in net interest margin amid the upcycle for the overnight policy rate (OPR).

However, the CNP growth for banks would come down to 17.1%, assuming SRR is tightened. Similarly, for banks’ dividend yield, he anticipated this would result in a lower yield of 5.2% against the previous estimate of 5.4%, based on simple average.

“Based on our simulation, the tightening of SRR would reduce banks’ aggregate net profit by 3.2% (FY2024 for Hong Leong Bank Bhd, AMMB Holdings Bhd and Alliance Bank Bhd; FY2023 for the rest),” its analyst Winson Ng said in a note on Wednesday (Feb 8).

“Within our coverage universe, we see the smallest impact on Maybank [Malayan Banking Bhd] at 2.3% of its net profit as about 25% of its revenue is generated from overseas markets. The impact would be the greatest on Affin Bank Bhd at 8.4%, based on our estimate, due to the low base of its existing statutory reserve,” he added.

Net interest margins compression

Ng said banks have benefited from the lower SRR since March 2020, as the statutory deposit maintained by banks with BNM is interest-free, and hence, no income is generated for this fund.

However, he said the SRR tightening would reduce banks’ net interest margins by an estimated 5.9 basis points (bps), but this should be more than offset by the positive impact from the series of OPR hikes (100bps in 2022 and the expected 50bps in 2023).

Should the SRR be tightened, he estimated that banks would have to top up their statutory reserves by RM39.4 billion, which he thinks banks will be able to achieve given their strong liquidity positions.

“In FY2021, banks’ liquidity coverage ratios — the key barometer for liquidity — ranged between 135.6% and 180.1%, which were significantly higher than the minimum requirement of 100%,” he elaborated.

Loan growth won’t be affected

Ng does not expect the SRR tightening to impact the banking industry’s loan growth as the liquidity positions of all major local banks are at comfortable levels — even after the tightening of SRR — to meet the credit demand in the banking system.

“In addition, we believe Bank Negara Malaysia would ensure that any SRR tightening does not impede the banks’ ability to lend, which is essential to support economic growth. We are projecting slower loan growth of 4%-5% for 2023, versus 5%-6% for 2022. This is not because of any negative impact from SRR tightening but rather due to our projected weaker GDP (gross domestic product) growth forecast of 4.4% in 2023 versus 8.4% in 2022.”

“In addition, we think that the strong expansion of around 8% in auto loans in 2022 would not be sustainable and could moderate to the low single-digit rates, in line with our expectations of lower car sales in 2023,” he explained.

Banking stocks lose ground

Amid news that SRR could be adjusted upward soon, banking stocks dominated the top losers list on Wednesday (Feb 8), with Hong Leong Financial Group Bhd being the top loser (by value) after it fell 2.1% or 38 sen to RM17.92.

This was followed by CIMB Group Holdings Bhd, which dropped 18 sen or 3.2% to RM5.40, Hong Leong Bank, which slipped 18 sen or 0.9% to RM20, and RHB Bank Bhd, which fell 15 sen or 2.7% to RM5.51.

Maybank, however, bucked the downtrend in the banking sector, as it gained one sen or 0.1% to RM8.64.

The Financial Services Index on Bursa Malaysia shrank 1.12% to 15,954.56 points.

CGS-CIMB’s picks for the sector are Hong Leong Bank, RHB Bank and Public Bank Bhd.