Bank Negara Malaysia (BNM) has designated Maybank, CIMB and Public Bank as Domestic Systemically Important Banks (D-SIB), under a policy document issued yesterday. Under the framework, the applicable higher loss absorbency (HLA) requirement for Maybank and CIMB are at 1.0% while Public bank at 0.5% of risk-weighted assets (at consolidated level). In our view, these banks already have sufficient CET1 capital level which are ahead of Basel 3 requirements and as such, do not need to raise additional equity capital unless their capital ratios dipped below the requirements set by BNM. The main implication going forward is on dividend payouts, of which could be impacted as it also require the approval of BNM. At this juncture, we maintain our NEUTRAL rating on the banking sector.

Designation of Maybank, CIMB and Public Bank as D-SIBs

On 5 February 2020, BNM issued a policy document on the Domestic Systemically Important Banks (D-SIB) framework, of which has designated Maybank, CIMB and Public Bank under the category. D-SIBs refer to banks whose distress could potentially cause considerable disruption to the domestic financial system and the wider economy.

Additional Capital Requirements of Between 0.5% to 1.0%

As a result, BNM mentioned that these D-SIBs would need to maintain higher capital buffers (at the consolidated level), which is to meet a Higher Loss Absorbency (HLA) requirement. Maybank and CIMB have been identified to be under the Bucket 2 category, whereby these banks have to set aside a 1.0% HLA as a percentage of their risk-weighted assets. Meanwhile, Public Bank has to set aside 0.5% as HLA requirement. Looking at the CET-1 ratios of these D-SIBs (as at 30 Sept 2019), Maybank’s stood at 14.4%, CIMB Group at 13.1% and Public Bank at 13.1% - all of which are well ahead of Basel 3’s regulatory requirement of 7.0%.

Dividend Payouts of D-SIBs Could Potentially be Impacted

We believe that the sector implication is minimal and that these D-SIBs do not have to resort to raise additional equity capital, at current level. Nonetheless, the ability of these D-SIBs to pay higher dividends could potentially be constrained by this requirement. But that said, any approvals come from BNM and also depends on the ability of these D-SIBs to generate higher profitability. We maintain our NEUTRAL sector call, noting that earnings catalysts are lacking while loan growth may moderate further to 3% in 2020 due to lacklustre business and consumer sentiment. At this juncture, we foresee a contraction in sector core EPS of 1.8% yoy in 2020E and flat growth in 2021E.

Source: Affin Hwang Research - 6 Feb 2020