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1% Rise In Statutory Reserve Rate Little Effect On Lending Low Loan-to-Deposit Ratio Puts Banks In Favourable Light
Malaysia Perspective | 02 August 2011
By:

By MIGB

After its monetary policy meeting in July, Bank Negara announced that it would maintain the overnight policy rate (OPR) at 3%, taking the market by surprise. Analysts believe that in view of the menacing state of inflation, BN may still have some headroom to raise interest rates, benefitting banks with relatively low loan-to-deposit (LTD) ratio.

OCBC Bank’s analysis report pointed out that in holding the OPR unchanged, BN is bracing itself for stormy weathers in the macro economy, including the tumult in Europe and US. Coupled with a less-than-rosy outlook for the industrial production index (IPI) and other data due to be released, holding OPR steady is one way to keep the economy growing steadily.

Although inflation is still high in Malaysia, taking into account that economic growth requires more space for lending and hot money is still plentiful, it is expedient to raise the statutory reserve ratio (SRR) by between 1% to 4% and keep OPR at 3%. This does not preclude the possibility of BN raising interest rates this year though.

OSK Securities (OSK) opined that increasing the SRR will not affect the market’s appetite for lending. Rather, how high or low a bank’s LTD ratio is the key factor that decides whether it is a willing lender or not.

For this reason, OSK Securities is expecting banks with relatively low LTD ratio, such as Hong Leong Bank, to perform better than other industry players. OSK continues to be optimistic about the performance of CIMB, Maybank and RHB Capital.
Overall, OSK is sticking to its “better than market” investment rating for the banking sector.

Past statistics have shown that even when Malaysia’s SRR rose significantly from 9.5% in April 1994 to 13.5% in June 1996, it had not affected the market’s appetite for lending. The banking sector’s annual loan growth rate kept rising steadily from 14% in April 1994 to 35% in February 1997.

It was not until the late 1990s, when the economy took a nosedive and saw the LTD ratio soaring past 94%, before we saw a marked decline in the loan growth rate.

OSK Securities pointed out that, assuming the economy can register a growth rate of 5.6% for 2011, the average LTD ratio of Malaysia’s banking sector as a whole is currently about 84%, which is still some way from the 90-92% that most of the industry players is able to sustain. “We believe that even if the statutory reserve ratio continues to rise, even up to 6%, it will not affect the loan growth rate.”

“The upward adjustment of the SRR by 1-4% will only have a negative impact on the 1.1% average profitability among the banks that we are tracking. Assuming an average interbank interest rate of between 2.76% to 2.80%, from which industry players may register a cash surplus whereas their profits will receive zero interest, just like they were held as compulsory deposits with the Bank Negara.”
“For this reason, the banks’ net interest margin (NIM) is expected to face a minimal negative impact.”

However, OSK also warns that as banks pro-actively lower their LTD ratio, combined with the prospect of BN continuing to raise the statutory reserve ratio in the foreseeable future, “We are concerned that a loans-and-deposits war may break out among the industry players, especially for deposits.”

“In short, those banks with the lowest LTD ratios will be minimally impacted, among which Hong Leong Bank is in the best shape.”


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