Extended reprieve for banks from NSFR requirement to 2019
KUCHING: Analysts laud Bank Negara Malaysia’s (BNM) move to defer the implementation of the Net Stability Funding Ratio (NSFR) to not later than January 1, 2019 instead of the original date of January 1, 2018 as required under the BASEL III framework.
The Central Bank on Thusday said this is to allow the domestic banks to understand further the NSFR in terms of operational requirements to meet the NSFR standard.
The NSFR requires banking institutions to maintain a stable funding profile in relation to the composition of their assets and off-balance sheet activities.
This standard complements the Liquidity Coverage Ratio (LCR) which had been phased in since 2015.
Kenanga Investment Bank Bhd (Kenanga Research) welcomed the move as it believed some banks have been struggling to achieve the minimum regulatory requirements before January 1, 2018.
BNM added that only about 75 per cent of the banks have achieved above 100 per cent requirements and the deferment gives ample time for those still below the requirements, minimising the risk of sharp upward surge in cost of funds – as banks chase for long tenure deposits – thereby compressing NIMs.
“With most of the banks achieving NSFR exceeding 100 per cent, there will be less pressure for banks to intensify their deposittaking activities with higher deposit rates,” Kenanga Research explained in a note yesterday.
“The banks will be able to pay its funding costs with low costs debt instruments.
“Furthermore, take note that the loan-to-deposit ratio is used to calculate a lending institution’s ability to cover withdrawals made by its customers.
“So long as the LCR is sufficient, banks can actually able to manage a slightly higher LDR.”
AmInvestment Bank Bhd (AmInvestment Bank) said as at endJune 2017, the industry has an average NSFR of 107 per cent which is above the minimum regulatory requirement of 100 per cent.
“We understand that more than 75 per cent of banks have NSFR exceeding 100 per cent,” it said in a separate report, adding that in the first tqo quarters this year, the industry average NSFR has climbed as banks positioned themselves towards meeting the regulatory requirement.
“Meanwhile, the industry’s liquidity coverage ratio (LCR) is healthy with an average of 141 per cent, well above the minimum requirement of 100 per cent. On a comforting note, all banks have LCRs of more than 100 per cent.
“The industry’s LCR ratio has been rising in 1Q2017 and 2Q2017, contributed by banks’ take-up of MGS disposed by nonresidents.
“Banks have sufficient liquid assets and have diversified funding profiles with long-term borrowings in addition to customer deposits.
“As at June 2017, the banking system has an LD ratio of 89.3 per cent while loan-to-fund ratio (LTF) and loan-to-fund and equity (LTFE) ratio stood at 83.3 per cent and 73.5 per cent respectively.”
MIDF Amanah Investment Bank Bhd (MIDF Research) meanwhile said the added requirement may pressurise margin.
“In our opinion, the added regulatory requirement in the form of the NSFR may lead to competition in deposits especially for current accounts and savings accounts.
“This is due to the fact that banks may have to compete for funding which is 90 to 100 per cent Available Stable Funding (ASF) factor in order to maximise the NSFR calculation.
“However, banks do not have to rely solely on deposits to ensure compliance.
“It could source ASF from various sources such as short term papers and interbank borrowing amongst others.”
Nevertheless, MIDF Research said regardless of the source of funds, the new requirement may cause margin compression, either through competition driving up deposit rates or more expensive source of funds.
“While there may be pressure on margins once NSFR is implemented, we expect any margin compression to be moderate.
“Our view is based on the fact that a majority of the banks are already above the 100 per cent threshold which mean that the probability for competition to intensify is less.
“Lt is still early days to assess comprehensively the impact of the implementation of the NSFR requirement given that the exposure documents was just released.”