SRR relaxation can boost bank earnings

PETALING JAYA: The measure by Bank Negara to allow banks to count the Malaysian government securities (MGS) and the Malaysian government investment issues (MGII) that they hold as part of their statutory reserve requirement (SRR) is a boost for banks as it can lower the funding costs of lenders.

Banking analysts said this following the central bank’s decision on Tuesday to cut the overnight policy rate (OPR) to 2%, down by 50 basis points, and change the SRR ruling to allow banks to use MGS and MGII for SRR compliance.

These measures will boost liquidity in the market and therefore lower funding costs for lenders, said Aminvestment Bank in a report.

CGS-CIMB in a note said the measures were “overall positive” as it had imputed the OPR cuts in its earnings forecasts for banks but not the positive impact from the SRR relaxation.

“We see a small room for increase in earnings forecasts with the SRR relaxation, though this could be offset by higher loan-loss provisions, the research house told clients.

Aminvestment noted that the latest SRR measure by the central bank will release Rm16bil of liquidity into the banking system which would be an addition to the liquidity boost of Rm30bil from the earlier measure announced on March 19.

“The increase in liquidity in the market could further lower the funding cost for banks or encourage more holdings of MGS and MGII to generate interest income,” said Aminvestment.

On March 19, Bank Negara announced that the SRR ratio would be lowered by 100 basis points from 3% to 2% in an effort to shore up liquidity in the banking system.

The move, which took place on March 20, was in addition to each principal dealer being able to recognise MGS and MGII of up to Rm1bil as part of the SRR compliance.

The SRR is an instrument to manage liquidity and is not a signal on the stance of monetary policy, the central bank said in March.

The SRR basically refers to non-interest bearing balances that commercial banks are expected to keep with the central bank.

Generally, a lower SRR means a lower amount to be set aside with the central bank, hence lenders will have more funds to lend out and earn an interest on these instead.

Before these recent measures, Bank Negara had lowered the SRR ratio by 50bps to 3% on Nov 16,2019.

Prior to this, the ratio had been decreased from 4% to 3.5% on Feb 1, 2016.

The lowest the ratio has been is at 1% on March 1, 2009 during the global financial crisis.