NSFR grace period eases pressure on banks’ NIMs

PETALING JAYA: The extra grace period from the deferment of the net stability funding ratio (NSFR) implementation to Jan 1, 2019 will most likely ease pressure on banks’ net interest margins (NIM), as the risk of a sharp upward surge in cost of funds minimises, said Kenanga Research.

“However, we still do not rule out banks chasing a cheaper and easier source of funding, which is deposits (against capital funding) that could be at the expense of marketing cost, as credit demand accelerates ahead. “

“We also do not rule out the banks reducing their exposure to long-term loans as higher long-term loans will put pressure on NSFR and the banks will have to compensate by having higher longterm funding thereby adding pressure on their funding costs,” the research house said.

It is positive on the deferment and said the move is welcomed as some banks have been struggling to achieve the minimum regulatory requirements before Jan 1, 2018.

All in, Kenanga maintained its “neutral” stance on the sector as the prevailing challenges in the economy still remain.

It maintained its “market perform” call for most of the banking stocks in its coverage with the exception of Affin Holdings Bhd, AMMB Holdings Bhd, Alliance Bank Malaysia Bhd, CIMB Group Holdings Bhd and RHB Bank Bhd, which are at “outperform”, due to their undemanding valuations.

Meanwhile, HLIB Research said as banks have already taken measures to meet the requirements (NSFR and liquidity coverage ratio (LCR)), it foresees no material impact on banks’ balance sheet structure and near-term profitability.

“Most banks have started the exercise to rebalance their deposit structure since late 2015. The most common strategy is to compete for more sticky individual deposits in meeting the NSFR regulations (sticky deposits represent high bearing in available stable funding).”

HLIB said risks include deteriorating asset quality that will impact banks provisioning level and high household debt that will limit consumers’ ability to further gear up.

“We keep our ‘neutral’ stance on banking sector due to modest growth outlook for earnings, loan and deposit growth in the environment of stable gross domestic product expansion. We expect share price movements of banking stocks to be more muted into the remainder of the year as we see limited re-rating catalyst for the banking sector,” said HLIB. Its top picks are Malayan Banking Bhd and BIMB Holdings Bhd.