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New Straits Times
04-07-2025
- Business
- New Straits Times
Bank Negara may need to do more as liquidity strains persist
KUALA LUMPUR: A month after Bank Negara Malaysia reduced the amount of reserves that banks must set aside, early signs show the move has helped ease liquidity pressures in the financial system, but analysts say it may not be enough. The 100 basis-point reduction in the Statutory Reserve Requirement (SRR) on May 16 injected RM19 billion into the banking system. CIMB Securities said the additional cash helped bring down short-term borrowing costs, but deeper funding stress remains. "These actions had a measurable impact in easing funding conditions, as seen in the reduction in interbank rates," CIMB Securities senior economist Azri Azhar and head of research Michelle Chia said in a note. They were referring to the Kuala Lumpur Interbank Offered Rate (KLIBOR), the interest rate banks charge each other for short-term loans. A commonly watched measure, the spread between the three-month KLIBOR and the Overnight Policy Rate (OPR), has narrowed from 65 basis points (bps) to 49 bps since the SRR cut. However, that spread is still wider than the pre-pandemic norm of 35-45 bps, suggesting that borrowing costs in the system remain higher than ideal. In short, banks still face some difficulty accessing affordable short-term funds, which can limit their ability to lend. Credit growing faster than deposits One of the key reasons is that loan growth continues to outpace deposit growth. For the past 16 consecutive months, banks have been lending more than they have been able to collect from depositors. CIMB Securities said this has pushed the loan-to-deposit ratio to 87.9 per cent, close to its upper comfort limit. "Liquidity has improved, but it has not recovered to the more comfortable levels above RM60 billion, which support a more constructive loan-deposit ratio," the firm said. It added that the situation is further compounded by how Malaysians, both consumers and businesses, are choosing to hold their money. In May, fixed deposits, traditionally a stable source of bank funding, shrank by 1.2 per cent year-on-year. At the same time, foreign currency deposits surged by 16.7 per cent, as more Malaysians shifted their savings into US dollars or other currencies in search of better returns or to hedge against ringgit volatility. This trend reduces the availability of ringgit funding in the local banking system, making banks more reliant on short-term interbank markets to meet demand. External risks and policy room CIMB Securities said these funding pressures are occurring against a backdrop of uncertain global conditions, including the potential economic fallout from US President Donald Trump's tariff regime. It noted that Malaysia's economy grew 4.4 per cent in the first quarter of 2025, the slowest pace in a year, partly due to a front-loaded export push ahead of the anticipated tariff changes. More concerning, the firm said, is that money supply growth continues to lag behind nominal gross domestic product, signalling that monetary conditions remain tighter than ideal for an economy facing mounting external risks. With the SRR now at one per cent and the OPR unchanged, CIMB Securities said there is still policy space for further action, either by cutting interest rates or by making more liquidity available through additional SRR tweaks. It noted that funding pressures typically intensify toward year-end, with the KLIBOR–OPR spread widening sharply in December, reaching as high as 93 bps in 2022, 77 bps in 2023, and 73 bps in 2024. A preemptive move now, the firm added, could help Bank Negara avoid another seasonal crunch and keep credit flowing smoothly through the second half of 2025.
New Straits Times
09-05-2025
- Business
- New Straits Times
Markets surprised by Bank Negara's RM19bil liquidity injection
KUALA LUMPUR: The statutory reserve requirement (SRR) reduction is a "quasi-easing" measure that caught markets off guard. But the move by Bank Negara Malaysia on Thursday may preserve the country's financial market competitiveness amid a wave of regional monetary easing, said Hong Leong Investment Bank Bhd (HLIB). HLIB said the move came as a surprise given seemingly comfortable liquidity position of the banking sector. It pointed out that the sector's liquidity coverage ratio stood at a healthy 152 per cent as of March 2025, while the loan-to-deposit ratio remains comfortable at 87.6 per cent, still below its five-year peak of 89.7 per cent. Deposits are growing steadily at 3.0 per cent year-on-year, while credit demand remains strong and fixed deposit competition is relatively muted. HLIB said the gradual decline in the three-month Kuala Lumpur Interbank Offered Rate (KLIBOR) since early this year from 3.73 per cent to 3.63 per cent further supports the view of sufficient interbank liquidity. "We believe this move, while seemingly accommodative, is primarily aimed at preserving Malaysia's financial market competitiveness amid regional easing trends. "Rather than indicating economic unease necessitating a monetary policy adjustment, it likely reflects a proactive stance against potential external risks," the firm said. Bank Negara unexpectedly slashed the SRR ratio by 100 basis points to one per cent yesterday, marking the first such move since March 2020. The cut is expected to inject about RM19 billion in additional liquidity into the banking system. By utilising an SRR cut instead of an OPR reduction, HLIB said the central bank strategically avoids direct pressure on the ringgit and the associated risk of imported inflation. Based on its calculations,the firm said the additional liquidity could boost bank net profits by one to three per cecnt, providing a buffer against a potential rate cut. "Our house view remains that a 25 basis points OPR cut is likely in the second half of 2025," it added. HLIB maintained its "overweight" stance on the banking sector, citing a favourable risk-reward profile with sector valuations at 1.09 times price-to-book value (P/BV), a 0.5 standard deviation below the 10-year average. The firm also said the sector has an attractive average dividend yield of 5.1 per cent and resilient earnings capacity backed by substantial pre-emptive provisioning buffers. MIDF Research said the reduction of the SRR, the lowest level in 14 years, is a proactive measure to ensure sufficient liquidity amid heightened concerns of the effects of trade war and risks of global slowdown. "This may encourage banks to extend more credits to the economy and support further expansion in the domestic economic activities. "For the record, banking loan growth moderated to 5.2 per cent year-on-year in March 2025, slower than 5.5 per cent in December 2024 and average 5.9 per cent rise in 2024," it said. UOB Global Economics & Markets Research said the move will help support continued lending activities to ensure stable economic activity. Following the dovishness in the latest monetary policy statement and the SRR cut, the firm expects two 25 basis points OPR cuts, one each in the third and fourth quarter of 2025, from status quo previously. "This will take the OPR to 2.5 per cent by end-2025. The Monetary Policy Committee (MPC) will next meet on July 8-9, which coincides with the end of the 90-day reciprocal tariff pause that could bring the tariff rate for Malaysia back up to 24 per cent from the current baseline 10 per cent tariff imposed," it said.
