The 50bp cut in SRR is seen to be mildly positive for the banking sector, with an estimated impact of only c.1-2%. Although the BNM’s decision was arrived to ensure adequate liquidity and support an orderly functioning domestic financial system, we do not think this is a major issue considering that deposits growth is printing at a faster pace vs loans. Whereas, if BNM’s ultimate objective is to spur lending activities, we believe this is not an effective tool given that credit demand has been weak. Regardless, it will help to alleviate NIM pressure. All in all, the growth outlook for banks is still modest but we draw comfort from the sector’s inexpensive valuations as it trading near -2SD to its 5-year mean P/B. We retain NEUTRAL and advocate selective stock picking rather than blanket exposure to the sector. Preferred pick is Maybank (TP: RM9.50). Other BUYs are RHB (TP: RM6.45), BIMB (TP: RM5.00), and Alliance (TP: RM3.40).

NEWSBREAK

In an unexpected move, Bank Negara Malaysia (BNM) lowered the Statutory Reserve Requirement (SRR) ratio by 50bp to 3.00%. The decision was arrived to help maintain adequate liquidity and support an efficient functioning domestic financial system. This will come into effect on 16 Nov 2019; the last cut was back in Feb-16, of similar 50bp quantum.

HLIB’s VIEW

Easing NIM pressure. The 50bp cut in SRR is expected to provide additional liquidity of RM7.4b into the banking system and this is seen to be mildly positive for the sector (representing only 0.4% of existing industry loans base). From our calculations, the release of reserves would benefit banks, with an estimated impact of only c.1-2% (4% yield assumption being employed). Although system loan-to-deposit ratio (LDR) stood at historic high of 89% in Sep-19, we do not think liquidity is a major issue considering that deposits growth is printing at a faster pace of 4.2% vs loans expansion of 3.8% YoY. Whereas, if BNM’s ultimate objective is to spur lending activities, we find this is not an effective tool given that credit demand has been weak (YTD Sep-19 loans applications: -2.1% YoY). In any case, we believe the SRR reduction will only help to ease net interest margin (NIM) pressure through mitigation of negative carry effect.

Forecast. Unchanged although we have not considered an SRR reduction in our NIM estimates. We will review this during the respective individual banks’ reporting period, which is around the corner.

Retain NEUTRAL. Although the growth outlook for banks is modest, we draw comfort from the sector’s inexpensive valuations as it trading near -2SD to its 5-year average P/B. Those that favour exposure to this sector have to be selective. We like banks that give above average dividend yields (Maybank; TP: RM9.50), still eking out healthy growth (RHB; TP: RM6.45 & BIMB; TP: RM5.00), and valuations got bashed down to - 2SD and trough P/B (Alliance; TP: RM3.40).

Source: Hong Leong Investment Bank Research - 18 Nov 2019