BNM announced a 1% cut in the Statutory Reserve Requirement (SRR) Ratio from 3.0% to 2.0% (which will be effective 20 Mar 2020). Additionally, BNM had also allowed each Principal Dealer the flexibility to recognize MGS/MGII of up to RM1bn as part of SRR compliance. These combined measures will release approximately RM30bn worth of liquidity into the banking system. In our view, the impact will be positive for the banks as the additional liquidity would ease their funding cost while simultaneously allowing banks more room to stepup lending activities (to boost the flagging economy). At this juncture, we are still cautious of the banks’ near-term outlook due to the negative repercussions of the COVID-19 outbreak. Maintain UNDERWEIGHT. Our stock pick: ELK-Desa.

BNM Injects More Liquidity Into the System Through a 1% SRR Cut

BNM announced a reduction in the SRR ratio from 3.0% to 2.0% effective 20 Mar 2019. In tandem, BNM has also allowed each Principal Dealer the flexibility to recognize MGS/MGII of up to RM1bn as part of SRR compliance (until 31 Mar 2021). These combined measures will release approximately RM30 billion worth of liquidity into the banking system.

Not Sufficient for a Sector Re-rating, as Sentiment Stays Cautious

In our view, though the cut in the SRR ratio is often perceived as a measure to stimulate bank lending and lower bank’s funding cost, we believe that the impact will not be immediately felt due to the muted global economic outlook while prevailing domestic sentiment is shrouded with recession fears a result of the prolonged Covid-19 outbreak. Nonetheless, the cut in SRR ratio overall is marginally positive for the banks’ earnings (+1.5% to +3.9%) through additional lending activities or investments (Fig 1, page 2).

Maintain Sector UNDERWEIGHT

We maintain our sector UNDERWEIGHT call, noting that earnings growth remains unexciting while investor sentiment is highly risk-averse - we foresee a contraction in sector core EPS growth of 11.6% yoy in 2020E, and a slightly modest growth rate of +1.4% yoy in 2021E. According to our economist, BNM may lower its SRR further from the current 2%, to inject more liquidity into the banking system and secondly, may potentially undertake another 25bps cut in the OPR at the next MPC meeting (in May 2020) in view of the negative repercussions from Covid-19 outbreak on the domestic economy. On our stock picks, we remain selective and prefer ELK-Desa (BUY, PT RM1.58) due to its attractive yields and resilient business in the auto-financing of mass-market used-cars.

Source: Affin Hwang Research - 20 Mar 2020