February 11, 2011

CIMB - Impact of SRR hike is minimal

Stock Name: CIMB
Company Name: CIMB GROUP HOLDINGS BERHAD
Research House: AMMB

Banking sector
Maintain overweight
: In the recent monetary policy statement, Bank Negara Malaysia (BNM) said the large and volatile shift in global liquidity is leading to a build-up of liquidity in the domestic financial system. While the liquidity has been manageable, going forward, additional policy tools, such as the statutory reserve requirement (SRR) and macroprudential lending measures, may be considered to avoid the risks of macroeconomic and financial imbalances.

BNM had lowered the SRR by three percentage points (ppt) since the start of the global financial crisis in 2008. This brought the SRR to a historical low of 1% currently from 4% in November 2008.

We have done a sensitivity analysis to gauge the impact on banks' earnings, assuming the SRR rate is increased by 1%. We estimate possible downgrades to banks' net earnings ranging between 0.3% and 2.2%. The ones which may be affected the most would be EON Capital Bhd (EONCap) (-2.2%), Alliance Financial Group Bhd (AFG) (-2.1%), Malayan Banking Bhd (Maybank) (-2.1%) and Public Bank Bhd (PBB) (-1.4%). For EONCap and AFG, it would be due to the small earnings base, while for Maybank and PBB, it would be due to the large deposit base (PBB's local market share of deposit is estimated to be the highest at 14.6% while Maybank's is the second highest at 14.0%).

We estimate every 1ppt increase in SRR rate would reduce the amount available for lending by RM7.65 billion, just for the eight banks alone. However, we believe this is representative of the bulk of the banking system, as the local market share of these eight banks is estimated at 67.8% for deposits and 75.2% for loans. Thus, we would conclude that a reduction in liquidity of RM7.65 billion for the eight local banks is not expected to have a major impact on the system liquidity of RM255 billion currently, or the overall lending ability of the banking system.

To sum up, we expect minimal changes to our banks' net earnings arising from the possible rise in the SRR. We will be building in an SRR hike of 1ppt to 2% from our current assumption of 1% when we review our earnings estimates in the upcoming results. Further, based on the current loan-to-deposit ratio and the liquidity in the banking system, we conclude that an SRR hike is not expected to affect current liquidity or the lending ability of the banking system. Banks' share prices have taken a beating last week, which we believe to be in line with the generally weaker regional market. However, we remain positive about the banking sector. We believe a stronger top line growth in terms of loans growth and non-interest income arising from sustained capital market activities from a successful execution of the Economic Transformation Programme is not yet fully reflected. Our buys are CIMB, Maybank, Hong Leong Bank Bhd and RHB Capital Bhd. ' AmResearch, Feb 11


This article
appeared in The Edge Financial Daily, February 14, 2011.

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