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Moratorium to weigh on banks’ funding cost and NIM

25 Mar 2020 / 23:50 H.

PETALING JAYA: Bank Negara Malaysia’s (BNM) additional measures to relieve borrowers, including an automatic moratorium on all loans for SMEs and individuals will further weigh on banks’ funding cost and net interest margin (NIM).

During the six-month grace period, banks’ minimum net stable funding requirement could be lowered to 80% (and to revert to 100% from Sept 30, 2021) and they are also allowed to operate below the minimum liquidity coverage ratio (LCR) requirements of 100%.

“We believe that during this, banks will be allowed reasonable time to rebuild their buffers should there be severe constraints. This means raising more long-term funding and building up their stable deposit base. As a result, this will put further pressure on its funding cost and NIM,” Affin Hwang Capital said.

Affin Hwang foresees that banks’ LCR will decline more significantly as banks would still require working capital to continue paying for interest expense, meet deposit withdrawals and debt repayments as well as sustain its overheads. It believes that investor sentiment will remain negative on banks and will not be surprised at another round of selldown.

The research house maintained its sector underweight call, noting that earnings growth remains unexciting and a prolonged Covid-19 outbreak will cause non-performing loans to spike.

TA Research, however, said the reduction of regulatory reserves should help lift the banks’ common equity tier-1 ratio.

Overall, the research house is optimistic that the additional preemptive measures would help temporarily ease the burden of the rakyat as well as provide banks with sufficient capital and cushion the impact from a potential liquidity tightening scenario due to rising asset quality risks.

“However, we are reiterating our underweight stance on the banking sector for now. While BNM had also eased the requirements for lending to the broad property sector and for the purchase of shares and units for unit trust funds as outlined in these measures, we believe demand will remain weak, at this juncture,” TA said in a report.

“We also foresee rising asset quality risks due to a confluence of negative factors to weigh heavily on the sector.”

PublicInvest Research said on face value, the moves appear to be net negative to the sector given the lower interest income receipts for a period of six months. Nonetheless, the moves by BNM are necessary to stem potential asset quality issues which may have an even more negative impact on the sector and consequently, stock valuations.

“The sector is currently facing a triple threat of compressed margins (from possibly more OPR cuts), slower loans growth (from sluggish economic momentum) and weaker asset quality (through possible business shutdowns).

“While we maintain our neutral stance on the sector given the lack of clarity on earnings prospects at this juncture, trading opportunities (RHB Bank and Public Bank) are attractive. We continue to like AMMB and CIMB for their earnings growth stories.”

Its earnings estimates are left unchanged at this juncture though it cautioned for 5-15% cuts in view of further margin compressions and weaker loan growth momentum.

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