PETALING JAYA: Bank Negara has cut the statutory reserve requirement (SRR) ratio to an “unnaturally low figure”, heavily implying that the overnight policy rate (OPR) could be reduced later.
However, until the OPR is actually reduced, analyst Samuel Woo of MIDF Research said the lower SRR will bode well for banks’ net interest margin (NIM) outlook, alleviating cost of fund-related concerns.
“At the very least, banks now have more cash for investment purposes,” said Woo in a note.
A cut to the OPR, down from 3% currently, will offset the upsides to NIM, he added.
“Whether or not this is enough to jumpstart loan growth remains to be seen.
“1% is an unnaturally low figure for the SRR rate to be at. Hence, we are expecting this figure to revert to a higher range once signs of economic improvement start to show,” stated Woo.
On May 8, Bank Negara announced that the SRR will be reduced by 100 basis points from 2% to 1%, effective May 16.
This will release about RM19bil into the banking system, at a time of heightened volatility and uncertainty in global financial markets.
The central bank’s announcement came on the same day the Monetary Policy Committee decided to keep the OPR unchanged at 3%.
TA Research analyst Wong Li Hsia called the SRR reduction as “broadly positive” for the banking sector, providing banks with additional balance sheet capacity to grow loans and better manage funding costs.
This could support higher NIM, especially for banks with a stronger focus on net interest income (NII).
“That said, we note that the system’s average loan rate has slipped to 4.97% in March 2025 from 5% a month earlier and 5.37% in March 2024.
“Our estimates suggest that the improved liquidity conditions could lift overall banking sector earnings by around 1.9%.”
While the additional liquidity is expected to support credit growth, Wong said banks may also choose to allocate a portion of the freed-up reserves into other income-generating assets, particularly government securities and corporate bonds, thus providing an alternative income stream, especially if loan demand remains subdued in the near term.
TA Research made no change to its earnings estimates for now, pending guidance from the banks.
“We also maintain the 2025 loan growth forecast at 6.2% for now, underpinned by consumer and business loan growth of 6.7% and 5.5%, with consumer loans remaining a key driver,” according to Wong.
Rakuten Trade described Bank Negara’s decision to cut the SRR to 1% as “aggressive”.
However, it believes that the move will spur market confidence.
“However, we hope the banks will also play their part to be less stringent in loan approvals. We view Bank Negara’s latest move may encourage some buying interest in the banks.”
Meanwhile, Hong Leong Investment Bank (HLIB) Research said the SRR reduction came as a surprise, given the seemingly comfortable liquidity position of the banking sector.
On an aggregated basis, there are minimal signs of liquidity stresses in the banking system, with the latest March 2025 liquidity coverage ratio or LCR at a healthy 152%.
The system loan-to-deposit ratio or LDR stands at 87.6%, still below the five-year peak of 89.7%.
Deposits continue to grow at a steady 3% year-on-year, and fixed deposit competition remains subdued, with no major price wars.
Credit demand also remains robust, with loan applications up 5.9% year-to-date.
These, collectively suggest no immediate, system-wide liquidity distress.
Similarly, the gradual decrease in the three-month Kuala Lumpur Interbank Offered Rate since early 2025 signals interbank liquidity.
HLIB Research believes that the SRR move, while seemingly accommodative, is primarily aimed at preserving Malaysia’s financial market competitiveness amid regional easing trends.
“By utilising an SRR cut instead of an OPR reduction, Bank Negara strategically avoids direct pressure on the ringgit and the associated risk of imported inflation.
“Positive for banks. Based on our calculations, the additional liquidity could boost bank net profits by 1%-3%, providing a buffer against a potential rate cut.
“Our house view remains that a 25-basis-point OPR cut is likely in the second half of 2025,” according to the research house.
