PETALING JAYA: Given the prolonged impact of Covid-19 and the enusing movement control order that was implemented, most analysts have already forecast an economic downturn for Malaysia this year. On the back of that, Bank Negara Malaysia is expected to make further cuts to the Overnight Policy Rate (OPR) by an estimated 75 basis points (bps).
Among the lenders, Alliance Bank Malaysia Bhd is expected to be hardest hit by the potential cuts, according to CGS-CIMB Research.
The research house estimated a negative impact of 33.5% to the bank’s FY21 net profit from an anticipated total OPR cut of 125 bps in 2020, against an average of 10% to other banks under its coverage.
“This is because of Alliance’s high floating-rate loan ratio of 82% in FY21 against the sector’s average of 76.5%. Meanwhile, its proportion of fixed deposit (FD) over total deposits of 58.2% projected in FY21 is the lowest in the sector,” it said in a report.
The research house noted, in the event of a rate cut, FD rates are adjusted downwards to offset the drop in lending rates. As such, Alliance’s smaller FD proportion provides little cushion against the lower loan rates.
“With that, we lower our FY21-22 net profit forecasts for Alliance by 17-22% to factor in another 75 bps cut in OPR,” it said.
CGS-CIMB elaborated that the banking sector loan growth could be impacted by the disruption of businesses during the MCO.
“Given the bleak outlook for the industry’s loan growth, we cut our projected FY21 loan growth for Alliance from 6.2% to 2.2%, leading to a negative impact of an estimated 3.2% on Alliance Bank’s FY21 net profit,” it said.
Furthermore, the research house noted that the bank’s asset quality was already deteriorating before the Covid-19 outbreak, as its gross impaired loan (GIL) ratio rose from 1.28% at end-December 2018 to 1.86% at end-December 2019.
It cautioned that there could be risks of a further increase in its GIL, by 20-30 bps, in FY21 as its economist is projecting a 4.3% contraction in Malaysia’s GDP in 2020 due to the MCO.
Meanwhile, BNM’s decision to cut the Statutory Reserve Requirement (SRR) ratio by 100bps, from 3% to 2%, effective March 20, 2020 and to allow principal dealers to recognise Malaysian Government Securities and Malaysian Government Investment Issues of up to RM1 billion as part of the SRR compliance, is expected to release about RM30 billion worth of liquidity into the banking system.
CGS-CIMB opined that the partial release of statutory reserves following the cut in the SRR ratio would benefit the sector as these funds can be invested/lent out to generate additional income for banks.
“Based on our estimate, the SRR cut would enhance Alliance’s FY21-22F net profit by about 2.2%,” it said.
Subsequently, it has factored this into its forecasts for Alliance.
With that, the research house has downgraded its call on the bank from ‘hold’ to ‘reduce’ given the negative impact of potential OPR cuts on its performance. It also lowered Alliance share’s target price to RM1.69, from RM2.42 previously.
