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The introduction of the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) under Basel III is likely to put pressure on the banks’ capacity to take high risk and improve margins, a report by a local equities brokerage said last week.
Asia Securities in its research findings stated that the LCR proposals required banks to hold high quality liquid assets in order to survive in emergent stress scenario while the NSFR would limit the over reliance on wholesale and short-term funding (money market) while ensuring that investment activities are funded by stable liabilities.

The Central Bank stated that it had already started implementing the Basel III on a staggered basis. Further, the report also said that the new rules, being formulated by the Central Bank “will lead to a stricter credit approval process which will result in slower credit growth.”

It also said that risk sensitive pricing where more credit towards customers with higher credit ratings at lower rates will affect margins while any reduction of securitization exposure, including credit card business, would further deteriorate margins (credit card is a high profitable business). Limits on lending will exert further pressure on Return on Assets (ROAs) and Return on Equity (ROEs).

“In order to maintain margins, banks will have to maintain the ratio limits well above the minimum standards which we think will result in additional capital being raised in the near future,” the report added.

The introduction of the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) under Basel III is likely to put pressure on the banks’ capacity to take high risk and improve margins, a report by a local equities brokerage said last week.
Asia Securities in its research findings stated that the LCR proposals required banks to hold high quality liquid assets in order to survive in emergent stress scenario while the NSFR would limit the over reliance on wholesale and short-term funding (money market) while ensuring that investment activities are funded by stable liabilities.

The Central Bank stated that it had already started implementing the Basel III on a staggered basis. Further, the report also said that the new rules, being formulated by the Central Bank “will lead to a stricter credit approval process which will result in slower credit growth.”

It also said that risk sensitive pricing where more credit towards customers with higher credit ratings at lower rates will affect margins while any reduction of securitization exposure, including credit card business, would further deteriorate margins (credit card is a high profitable business). Limits on lending will exert further pressure on Return on Assets (ROAs) and Return on Equity (ROEs).

“In order to maintain margins, banks will have to maintain the ratio limits well above the minimum standards which we think will result in additional capital being raised in the near future,” the report added.