BNM reduced the Statutory Reserve Requirements by 0.5% to 3.5% to ensure sufficient liquidity in the banking system. We view its impact to be negligible as only RM5b will be released into the banking system and raised estimated 2016 net interest income by only 1%. All things considered, the banking sector still lacks rerating catalysts; structural and cyclical headwinds such as: (i) moderating economy, (ii) muted loans growth, (iii) constricting liquidity environment, (iv) narrowing NIM, (v) weak capital market activities, as well as (vi) rising credit cost are plaguing the industry. All in, we maintain our NEUTRAL stance on the sector. MAYBANK (TP: RM9.74) and RHBCAP are the only OUTPERFORMs in our universe, while AFFIN (TP: RM2.17) and CIMB (TP: RM4.06) are the UNDERPERFORMs. The others are MARKET PERFORMs.

BNM reduced its Statutory Reserve Requirement to 3.5% Yesterday BNM announced the reduction in the statutory reserve requirement (SRR) ratio from 4.00% to 3.50%, effective from 1 Feb 2016, to ensure sufficient liquidity in the domestic financial system. BNM added that since early 2015, it has relied on its monetary operations, including the reverse repo facility, to provide liquidity to the banking system as net external outflows reduced the amount of liquidity in the system. In a separate statement, BNM said at its Monetary Policy Committee (MPC) meeting, it had decided to maintain the OPR at 3.25%.

Lower deposits growth resulting in higher cost of funds. As of Sep 2015, LDR in the Malaysian banking industry stood at 93.1% as compared to 90.3% in Sep 2014. For the period between 2012 and 2013, the average LDR in the banking industry was 88.1%. Slower deposit growth as compared to loans has contributed to the high LDR. This resulted in higher costs of funds (COF) as banks chased deposits by giving better rates. Average COF was at 2.30% (2012- 2013) vs 2.63 (Sep 15).

Negligible impact to the banking system. We viewed that the lower SRR has negligible impact to the banking system. As the Statutory Liquidity now stood at RM40b, the reduction will only release about RM5b into the banking system, hardly significant against the amount of deposits in the banking system estimated at around RM1,000b with negligible impact on the industry’s LDR. COF might stabilize as banks might not be so aggressive in chasing deposits with the amount released. Impact of Net Interest Income (NII) is also negligible as it only raised our 2016 forecast NII for the banking system by 1%.

Maintain NEUTRAL. As such, we are still NEUTRAL on the sector. No change in our views on structural and cyclical headwinds such as: (i) moderate economy, (ii) muted loans growth, (iii) narrowing NIM, (iv) weak capital market activities, and (v) higher credit costs plaguing the banking industry. Furthermore, there are no concrete catalysts and/or any game changer going forward. Hence, there is no change in our cautious stance and selective stock picking strategy. MAYBANK (TP: RM9.74) and RHBCAP (TP: RM7.26) are the OUTPERFORM stocks under our coverage. We like Maybank for its superior yield offerings of ~7% while we see deep value in RHBCAP with its Fwd. PBV merely trading at 0.6x compared to the industry’s Fwd. PBV of 1.4x. The other stocks under our coverage are MARKET PERFORMs, save for AFFIN (TP: RM2.17), and CIMB (TP: RM4.06), which are UNDERPERFORMs.