PETALING JAYA: RAM Ratings said the reduction in the statutory reserve requirement (SRR) ratio to 3.0% from 3.5% effective Nov 16 is expected to have only a marginal impact on the net interest margins (NIMs) of banks.
“As statutory deposits are non-interest-bearing, the redeployment of some of these funds for interest-earning activities such as lending or investing in bonds is margin accretive, all else being equal. Nonetheless, the margin uplift will be very small (~1 basis point) as the liquidity released forms less than 0.3% of the banking system’s total assets.
“NIMs will ultimately depend on the direction of the OPR, among other factors. A potential OPR cut in 2020, which is data-dependent, would cause mild NIM compression if it materialises,” the research house said in a statement today.
RAM Ratings also noted the striking contrast in the backdrop of the latest SRR reduction compared to the last one in February 2016 (from 4% to 3.5%).
“The banking industry’s liquidity is presently healthy, as evidenced by a liquidity coverage ratio of 144% as at end-September 2019 (end-December 2015: 125%). Deposits growth has slightly outpaced lending growth while interbank rates have declined,” said its co-head of financial institution ratings Wong Yin Ching.
The research house explained that the revision in 2016 came on the heels of meagre deposits growth in 2015, which had trailed lending expansion by a significant 5 percentage points.
“Additionally, aggregate outflows from the equity and bond markets were more manageable in the first 10 months of 2019 at an estimated RM4.6 billion (full-year 2015: RM30.7 billion).”
Based on the banking system’s RM51.5 billion of statutory deposits as at end-September 2019, a 50-basis-point reduction in the SRR ratio will release RM7.4 billion of liquidity on a pro forma basis.
“Assuming all the additional liquidity is channelled into lending, the industry’s loans would increase by 0.4 percentage points. However, the key challenge to loan growth is the tepid demand for credit amid muted business and consumer sentiments, and not a lack of liquidity,” Wong said.
