PublicInvest still ‘neutral’ on local banking sector despite new capital rules

PETALING JAYA: PublicInvest Research said it remains neutral on the local banking sector outlook after Bank Negara Malaysia (BNM) announced the new capital rules which do not require banks to maintain a reserve fund.

BNM noted that the reserve fund is no longer relevant given the implementation of the Capital Conservation Buffer under the Capital Adequacy Framework.

The central bank has instead introduced a new policy document in which it lays out minimum capital funds that must be maintained, and the components of this said capital fund.

“What’s subtle but relatively significant of nature is that BNM has allowed for the inclusion of irredeemable convertible unsecured loan stocks (ICULS) in the computation of capital funds, though this is limited to 25% of the total capital funds (excluding the ICULS),” PublicInvest Research said in a note yesterday.

Commenting on the new capital rules impact, the research house said any deemed excesses can be distributed as dividends, though the central bank expects financial institutions to exercise prudence before submitting any applications.

“While we reckon domestic bank institutions are sufficiently capitalised and ready for Basel III implementations to varying degrees, we don’t expect to see a flurry of dividend declarations in the near term however, as we see banks opting to adopt a wait-and-see stance at this juncture until further business-related clarities are seen,” it added.

Nevertheless, PublicInvest Research said while economic conditions are gradually improving, challenges still remain and banks may decide to maintain additional buffers to potentially counter any eventualities.

“We could see some changes (or additions) to capital components however (i.e. conversion of debt hybrid securities to quasi-equity), which could be a further boost to capital market activities,” it opined.

Meanwhile, PublicInvest Research sees system loans growth to average between 8-10% this year, underpinned by gradual improvements on the corporate front.

However, rising cost challenge is likely to keep the household segment subdued.

With most banks still vying for a greater slice of the lower-costing current and saving accounts (Casa) pie to mitigate overall margin erosion, it said competition within the industry will continue to be intense.