NSFR extension good news for banks
Deposit competition to be less intense in the near term
PETALING JAYA: The extension period for the adoption of the net stable funding ratio (NSFR) to 2020 is good news for banks, as it will lower funding costs and improve net interest margins (NIMs) which have been impacted by deposit competition.
Analysts told StarBiz that with the extension, competition for deposits generally would be less intense in the near term and this would lessen the pressure on funding costs and NIMs, which, in turn, would to an extent help improve earnings.
The near term refers to a period of at least six months or more.
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.
Analysts said weaker economic growth, prevailing deposit competition and weak non-interest income from capital market activities could hamper banks’ bottom line growth in the second half of the year.
Analysts have earlier lowered their projected earnings growth from an average of 7+% to 5+% for 2018. The first half-year earnings growth was higher at 10% year-on-year due to lower credit costs and lesser impairment expenses.
But with the one-year extension period given by Bank Negara to allow banks to adopt the NSFR requirement, analysts expect some banks to put their house in order in terms of funding practices.
“This is good for some banks, especially smaller ones, as it would give them more time to improve their liquidity positions under the upcoming Basel 111 framework,” a bankbacked analyst noted.
NSFR forms part of the Basel 111 regulatory framework.
Bank Negara on Oct 23 said that the adoption of the NSFR – a requirement to promote a more resilient banking sector – would only be done in 2020 in Malaysia, a year later than initially expected, to allow the extension of the observation period.
While the internationally agreed timeline for adoption was Jan 1, 2018, the central bank had previously planned to implement the standard for banks no earlier than Jan 1, 2019.
AmBank Research banking analyst Kelvin Ong, who is maintaining an overweight stance on the banking sector, said the intensi- ty of deposit competition is dependent on three key factors: banks’ loan growth, the need to build up liquidity and the necessity to raise long-term stable funding for NSFR.
As the NSFR would not be implemented on Jan 1, 2019, he expects competition for deposits to be less intense in the near term, as banks that are still short in meeting the minimum NSFR requirement of 100% will be given more room to improve their NSFR levels.
“This is likely to lower the pressure on banks’ funding cost and NIMs. Long-term funding is generally more costly than that of the shorter term, as banks need to pay out higher rates. Bank Negara has yet to give an actual date for the implementation of the NSFR,” he noted.
Meanwhile, RAM Ratings co-head of financial institution ratings, Wong Yin Ching, said although there may be a slight reprieve for deposit competition with the extended deadline for NSFR, the fight for deposits, particularly for retail and SMEs, would continue to be a constant feature, given the minimum liquidity requirement.
Furthermore, she said, as the NSFR favoured long-term or stable funding, banks are likely to continue diversifying their fund- ing sources through the capital market.
“We have observed an increase in banks’ issuance of senior notes and sukuk, both in terms of the number of issuing banks and issuance value,” Wong noted.
The NSFR, together with the liquidity coverage ratio (LCR), is a global standard introduced as part of the Basel Committee’s key reforms to develop a more resilient banking sector post the global financial crisis.
The NSFR requirement measures a bank’s long-term funding stability, while the LCR indicator measures a bank’s liquidity over a 30-day horizon.
On the central bank’s move to extend the NSFR period, Wong added that it would allow more time for a small number of banks that have yet to meet the 100% threshold to do so.
The average NSFR of the industry is already above 100%, with a vast majority of banks having exceeded the threshold, she said.
Maybank IB Research banking analyst Desmond Ch’ng, who is neutral on the sector, said the move to extend the NSFR period to 2020 is a positive one, as it allowed banks that have to comply some breathing space.
But he said the move is not a major surprise.
The industry’s NSFR average stood at above 100% and more than 75% of Malaysian banks are already compliant at this stage, he said in a research report.
For those that have yet to comply, he said, one of the solutions would be to pursue more retail deposits and/or raise longer-term debt funding.
“Both alternatives will effectively result in higher funding costs and compress NIM. Bank Islam, for instance, whose NSFR is about 80%, had estimated a 10-basis-point NIM compression from compliance.
“As such, this move buys some time for banks that have yet to meet the requirement, which could contribute to some easing of the prevailing competitive pressures on deposit rates in the short term,” Ch’ng said.