Banks in strong position to meet new funding rules, says CIMB Research

Will Maybank follow suit to raise its base rates?

KUALA LUMPUR: Malaysian banks are in a strong position to meet the requirement for the net stable funding ratio (NSFR), when it comes into effect in 2019 or later, says CIMB Equities Research.

The research house said on Friday that 75% of banks have met the NSFR minimum requirement.

On Thursday, Bank Negara Malaysia (BNM) held an analyst briefing, hosted by Assistant Governor Marzunisham Omar. The briefing was to provide more details on the NSFR. 

“We are slightly more positive on banks after the briefing as we gathered from BNM that more than 75% of banks are able to meet the minimum requirement for NSFR,” it said. 

BNM also stated that all banks have a liquidity coverage ratio (LCR), another liquidity benchmark, that exceeds minimum requirement of 100%.    

BNM issued the exposure draft for NSFR on Thursday and is giving banks two months to provide their feedback.  

Apart from the adoption of MFRS 9 in 2018, the NSFR requirement is one of the new major accounting/regulatory changes for banks. NSFR is a liquidity standard that requires banks to maintain a stable funding in relation to the composition of their assets and offbalance sheet activities. 

 NSFR is similar to the liquidity coverage ratio (LCR) but focuses more on a bank's longer term liquidity (resilience) to meet its commitments instead of short-term liquidity as in the case of LCR.
 
NSFR is derived from available stable funding over required stable funding while LCR is derived from high quality liquid assets over net cash outflows over the next 30 days. The minimum requirement for both NSFR and LCR is 100%.

“To meet the NSFR requirement, banks would have to offer higher interest rates for retail and longer-term deposits. 

“However, the impact on banks’ cost of fund would not be significant, in our view, because (1) all banks have beefed up their retail deposit base to meet the LCR requirement, (2) most banks would have started to position themselves to meet the NSFR requirement, and (3) 75% of banks have met the NSFR minimum requirement,” it said. 

CIMB Research retained its Neutral call on banks given the potential negative impact from the adoption of MFRS 9 in 2018 and unattractive valuations. 

“Also, we foresee the risk of weaker loan growth in 2017 vs. 2016. The upside/downside risks to our call are a pick-up/slowdown in loan growth and an improvement/deterioration in asset quality,” it said. 
    
Here’s CIMB Research explanation of what NSFR is:

Net stable funding ratio (NSFR) is a minimum standard that requires banks to maintain a stable funding profile in relation to the composition of their assets and off-balance sheet activities. 

A stable funding profile reduces the likelihood of a banking institution’s liquidity position being severely eroded by disruptions to its regular sources of funding.  

The NSFR complements the objectives of the liquidity coverage ratio (LCR) which has come into effect in Malaysia since 1 Jun 15. While the LCR encourages the short-term resilience (30 days) of a banking institution’s liquidity risk profile, the NSFR reduces funding risk over a longer term horizon (one year). 

  The formula for NSFR is as the following: NSFR = total amount of available stable funding / total amount of required stable funding.  

The minimum requirement for NSFR is 100%.
 
A banking institution shall comply with the minimum NSFR level on an aggregated currency basis. All foreign currency exposure must be reported in ringgit-equivalent terms based on the foreign exchange rates as at the reporting date. 

A banking institution must comply with the NSFR requirements at the following levels:

Entity level, referring to the global operations of the banking institution, i.e. domestic operations plus overseas branch operations as well as its Labuan banking subsidiary 

Consolidated level, which includes entities covered under the entity level, and the consolidation of all subsidiaries, except for insurance and takaful subsidiaries.

Skim Perbankan Islam (Islamic banking) level as if it is a stand-alone banking institution.