Another round in fight for deposits among banks likely
Competition to intensify after NSFR ruling takes effect next year
PETALING JAYA: A further Basel III ruling could spark another round of fighting for deposits among banks.
The net stable funding ratio (NSFR) requirement, which is expected to come on stream next year, requires banks to reduce their reliance on short-term funding.
Analysts foresee competition for deposits to intensify and may impact net interest margins (NIMs), which have shown improvement since the first quarter.
Analysts contacted by StarBiz said the competition for deposits may put pressure on funding costs and this could impact NIMs, which have been on the upside in the fourth quarter of last year and first quarter of this year after years of compression.
They said with the Basel III NSFR requirement taking effect next year, banks may start another round of competition for deposits, namely in retail and small and medium enterprise (SME) segments.
The NSFR requires banks to hold sufficient stable funding such as capital, long-term debt and retail deposits.
Its aim is to reduce reliance on short-term funding in the banks’ asset liability management. It may see an increase in long-term senior borrowings as well as competition for retail and SME customer deposits.
NIM is a measure of the difference between interest income generated by banks and interest paid out to depositors. The average lending rate and the three-month fixed-deposit spread serves as a proxy for the banking sector’s NIM.
AmInvestment Bank analyst Kelvin Ong said that for the second half of this year, there are expectations of continual mild pressure on banks’ NIMs, as banks are still suffering from higher rates for longerterm deposits in preparation for the implementation of the NSFR requirement in 2018.
Nevertheless, he is projecting a lower NIM contraction of three basis points this year, compared with four basis points last year.
Meanwhile, RAM Ratings co-head of financial institution ratings Wong Yin Ching, who continues to maintain a “stable” outlook on the Malaysian banking system, said the introduction of the Basel III NSFR requirement may turn up the heat again as competitive forces in the industry are still intense.
She said the NSFR is a quantitative requirement that sought to ensure longer-term resilience of a bank’s liquidity risk profile through banks funding their activities with more stable sources.
The NSFR may see an increase in long-term senior borrowings as well as continued competition for retail and SME customer deposits, Wong noted.
Without giving any projections for NIM, Wong said: “The industry’s NIM surprised on the upside in the fourth quarter of last year and in the first quarter of this year after years of compression.
“This was mainly on account of higher utilisation of deposits as loans and of a greater mix of lowcost current and savings account deposits.
“Such deposits had grown rapidly in recent months, by 8%-10%, possibly due to banks’ stronger focus in sourcing them and the improved performance of the export sector.
“However, we remain cautious about whether the improving NIM trend is sustainable.”
Malaysian Rating Corp Bhd (MARC) head of banking Sharidan Salleh said he did not foresee chal- lenges to meet the minimum requirement by early 2018, as the bigger banks should be in compliance or near compliance with the NSFR requirement.
Under the Basel III framework, banks are required to have a minimum ratio of 100% from 2018 onwards, he said.
Meanwhile, in terms of asset quality, Wong said she expected gross impaired loan ratio to nudge up to 1.8% by year-end.
This is because economic challenges in several sectors such as oil and gas, real estate as well as wholesale and retail trade may accelerate the pace of new impairments. The ratio as at end-May stood at 1.67%.
As for loan growth, she said the rating agency expected a flat expansion of 5%-6% in 2017, in line with the 5.5% year-on-year growth seen in May 2017.
Sharidan expects a loan growth at around 6% in 2017, on the back of higher GDP expansion for the year, and does not expect loan expansion in the second half of this year to be materially stronger than in the first half.
Ong said he is maintaining an overweight stance on the banking sector and expected it’s core earnings to grow by 8.6% this year from a flat earnings growth in 2016, adding that he projected loan growth of 5%-6% for 2017.