Although a cut in SRR is typically a mild positive for banks, the circumstance this time around may be different considering the drop in oil prices. There is a possibility that foreigners are withdrawing their ringgit-denominated deposits and BNM is attempting to mitigate this impact. Another potential reason is to coax banks to absorb the MGS selloff by foreigners. However, if the objective is to spur lending activities, we find this may not be an effective tool given that credit demand has been weak. Nevertheless, if the release of reserves were to use to reduce the negative carry effect (i.e. buy MGS), this will help to ease NIM pressure. That said, we are in the midst of reviewing our earnings forecasts, target prices, and stock ratings. For now, retain NEUTRAL; preferred picks are CIMB (TP: RM5.50) and Alliance (TP: RM3.05). Other BUY ratings are RHB (TP: RM6.00) and BIMB (TP: RM4.50).

NEWSBREAK

Unsurprisingly, Bank Negara Malaysia (BNM) cut the Statutory Reserve Requirement (SRR) ratio by 100bps to 2.00%. This will release some RM14.4b of additional liquidity into the banking system; the last cut was back in Nov-19 (-50bps).

HLIB’s VIEW

To tackle deposits withdrawal by foreigners? Although a cut in SRR is typically a mild positive for the banking sector (additional liquidity represents 0.8% of existing industry loans base), the circumstance this time around may be different considering the drop in oil prices. There is a possibility that foreigners may be withdrawing their ringgit-denominated deposits and BNM is attempting to mitigate this impact; we note system loan-to-deposit ratio (LDR) is already at a historic high of 89% in Jan-20. Another potential reason for the cut is perhaps to encourage banks to help step in to absorb the MGS selloff by foreigners. However, if the objective is to spur lending activities, we find this may not be an effective tool given that credit demand has been weak especially with the spread of Covid-19 (Jan-20 loans applications: -14.6% YoY). Regardless, if the release of reserves were to use to reduce the negative carry effect (i.e. buy MGS), this will help to ease net interest margin (NIM) pressure; from our calculations, the estimated profit improvement is only c.1-3% (3% yield assumption being employed).

Forecast. Unchanged as we are in midst of reviewing this following the spread of Covid-19.

Retain NEUTRAL as near-term headwinds are being balanced out by the sector’s inexpensive valuations. We like banking stocks that were acutely bashed down and especially those with P/B below 1.00x, GFC’s trough, and -2SD; two of our BUY calls meeting this criteria are CIMB (TP: RM5.50) and Alliance (TP: RM3.05), making them our preferred picks. Other BUYs are RHB (TP: RM6.00) and BIMB (TP: RM4.50). That said, we are also reviewing target prices and stock ratings together with our earnings revision exercise sometime next week.

Source: Hong Leong Investment Bank Research - 20 Mar 2020