Fitch sees higher rates for longer-tenor deposits

> Implementation of NSFR could prompt local banks to compete more aggressively and shift towards longterm wholesale debt funding

PETALING JAYA: The implementation of the net stable funding ratio (NSFR) could prompt banks to offer higher deposit rates for longer-tenor deposits, according to Fitch Ratings.

“The NSFR metric focuses on a 12month timeframe and is likely to encourage banks to compete more aggressively for even longer-tenor deposits, and shift towards long-term wholesale debt funding. Banks are also likely to offer higher rates on longer-term deposits and shift towards longer-term wholesale debt funding” said the research rating yesterday.

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 liquidity coverage ratio (LCR) was phased in.

While such a move may lead to higher funding costs and lower net interest margins, the rating agency said the impact on banks’ profitability is unlikely to be significant for the large banks or the banking sector as a whole.

Fitch Ratings also noted that banks may look to manage their assets to reduce their required stable funding. Highly liquid assets, short-term loans and mortgages with conservative loan/value ratios are all treated favourably under NSFR rules.

“Meanwhile, banks may seek to further streamline committed undrawn facilities as these would need to be partly prefunded under the regime.”

Fitch Ratings does not foresee difficulties for Malaysian banks to meet the NSFR requirement, which is part of Bank Negara Malaysia’s (BNM) implementation of Basel III regulations.

This is given that the banking sector has already shifted towards more stable funding structures in recent years, which should reduce vulnerability to market disruptions.

Although the banks may have to adjust their balance sheet significantly in meeting the NSFR requirements, Fitch said they will have time to make the adjustments as the new rules will be implemented no earlier than Jan 1, 2019, which would be at least a year behind the scheduled global implementation date of Jan 1, 2018 set by the Basel Committee.

BNM has said that more than threequarters of Malaysian banks have an NSFR that meets the minimum requirement, which will be set at 100%.

Fitch Ratings concurred and said that 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 are reasonably healthy.”

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 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, up from 103% at end-2016.