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KUALA LUMPUR, May 4 (Reuters) - Banks in Malaysia will no longer have to maintain a reserve fund, the central bank said on Wednesday, a move that analysts say recognises the banking sector's improved capital buffers and potentially allows them to pay out more dividends.
The relaxation of rules by Bank Negara Malaysia, which still requires banks to continue to maintain a minimum amount of capital, became effective from May 3.
Previously, the central bank had required banks to maintain a percentage of net profit as reserves, which could not be used to declare dividends.
While that is no longer the case, central bank approval would still be needed to payout dividends from reserve funds.
In a statement on its website on Wednesday, BNM said it "expects banking institutions to exercise prudence before submitting an application to distribute the reserves as dividends."
BNM said it removed the reserve fund requirement due to the implementation of the capital conservation buffer as part of the global "Basel III" rules enforced by regulators after the 2008 financial crisis aimed at bolstering the defences of banks worldwide.
AmInvestment Bank analyst Kelvin Ong said the central bank's move to remove the reserve fund requirement was a mild positive for banks as it showed the sector was well capitalised.
"Banks can be more flexible on dividend declaration now but they will still be prudent as it has to go through BNM for approval," Ong said.
BNM reiterated on Wednesday that domestic banks should maintain 2 billion ringgit ($462.64 million) as minimum capital funds. Islamic banks and locally incorporated foreign banks are required to maintain 300 million ringgit, while stand alone investment banks should maintain 500 million ringgit.
Public Investment Bank analyst Ching Weng Jin said the move does not necessarily mean banks will begin to declare a flurry of dividends as they may opt to adopt a wait-and-see stance.
"While economic conditions are gradually improving, challenges still remain and banks may decide to maintain additional buffers to potentially counter any eventualities," he said in a research note.
Banking stocks were lower on the local stock exchange due to weaker broader market sentiment, the analysts said.
Shares of Malayan Banking Bhd (Maybank), Malaysia's largest lender by assets, were down about 4 percent on Thursday. CIMB Group Holdings Bhd, the second biggest bank, was down 1 percent.
$1 = 4.3230 ringgit Reporting by A. Ananthalakshmi; Editing by Shri Navaratnam