Banks may offer higher rates on longer-term FDs

They’re moving away from short-term funding to meet new rules

PETALING JAYA: Malaysian banks are expected to offer higher rates on longer-term fixed deposits (FDs) to further move away from shortterm funding, which is discouraged under the proposed net funding rules and liquidity coverage ratio (LCR), says Fitch Ratings.

The ratings agency said banks are likely to continue to prioritise stable sources of funding over a longer term as they grew their balance sheets.

“In particular, we expect a further move away from short-term funding, which is discouraged under NSFR (net stable funding ratio) and LCR rules,” it said in a report.

Fitch noted that fixed deposits maturing within one month fell to 18% of total fixed deposits at end-August 2017 from 29% in January 2013 as the 30-day LCR was phased in.

The NSFR metric focuses on a 12-month timeframe and is likely to encourage banks to compete more aggressively for even longer-tenure deposits, and shift towards longterm wholesale debt funding.

“Banks are also likely to offer higher rates on longer-term deposits and shift towards longer-term wholesale debt funding.

“This could, to an extent, raise funding costs and lower net interest margins but the impact on profitability is unlikely to be significant for the large banks or the banking sector as a whole,” it said.

Fitch also noted that most major Malaysian banks are unlikely to face difficulties in meeting NSFR requirements, announced last week as part of Bank Negara’s implementation of Basel III regulations.

It said the banking sector had already shifted towards more stable funding structures in recent years, which should reduce vulnerability to market disruptions.

The ratings agency pointed out that Bank Negara had said that more than three-quarters of Malaysian banks had an NSFR that met the minimum requirement, which would be set at 100%.

“Indeed, most major banks have strong domestic deposit franchises and prudent funding and liquidity policies that should help them comply with the new rules.

“Moreover, the banking sector’s loan-deposit ratio of 89% and LCR of 133% at end-August 2017 indicate that the system’s aggregate funding and liquidity healthy.”

It noted that most banks had already made efforts to increase their retail deposits in recent years in anticipation of the NSFR rules and in response to LCR requirements, which the central bank started to phase in from 2015.

The NSFR and LCR frameworks both consider retail deposits to be more stable than corporate deposits and treat them more favourably.

Retail deposits accounted for around 43% of total deposits at the country’s top five banks at end-June 2017, up from 40% at end-2013.

Similarly, the system-wide NSFR ratio has risen to 107% at end-June 2017, which is an improvement from 103% as disclosed by Bank Negara at end-2016. are reasonably