CIMB: Maybank’s earnings could be hit if 1MDB loan impaired

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KUALA LUMPUR: Malayan Banking Bhd (Maybank) may see a negative impact on its financial year 2015 (FY15) bottom line by as much as 5.6%, assuming a 10% provisioning for its total loan exposure to 1Malaysia Development Bhd (1MDB) that could amount to some RM5.5 billion, said CIMB Investment Bank (CIMB IB) Research.

“The market is concerned about Maybank’s exposure to 1MDB as the local press reported that 1MDB  had failed to pay a RM2 billion loan due on Dec 31, 2014. We gather that Maybank’s loan exposure to 1MDB could amount to RM5.5 billion. A 10% provisioning for this would trim Maybank’s FY15 net profit by 5.6%, based on our estimates,” wrote CIMB IB’s analyst Winson Ng in a report dated Jan 6.

On Tuesday, The Edge Financial Daily reported that 1MDB had failed to repay the RM2 billion loan to local lenders due on Dec 31, 2014. It quoted sources saying 1MDB was given until Jan 30, 2015 to settle the debt that was originally due on Nov 30, 2014. Maybank and RHB Capital Bhd are the lead lenders of the loan.

Assuming the worst-case scenario, CIMB IB’s Ng said a full impairment of Maybank’s loans to 1MDB would slash 56% of his estimated net profit for Maybank in FY15 and cut the target price by about 44 sen to RM12.06.

But he believes an impairment of the loan is unlikely to occur as it is guaranteed by the government of Abu Dhabi. Furthermore, the loans would be settled if the sovereign wealth fund successfully lists its energy unit Edra Global Energy Bhd this year. “Hence, we do not see a high likelihood of full impairment of the loans,” said Ng.

The Maybank management declined to comment on its loan exposure to 1MDB, citing the Banking Secrecy Act.

A market observer said Maybank’s earnings will not be impacted at all as any impairment of the loan, if defaulted, is not likely to occur.

“The loan was due in November, but it was never impaired. Then, it got extended to December, which was also never impaired. It (the repayment) will forever be due and forever never be impaired,” she told The Edge Financial Daily over the telephone.

“So, if it is never impaired, how will it impact the [Maybank] financials?” she said rhetorically.

The market observer, however, warned that Maybank could suffer in terms of investor sentiment on its stock, citing that there would be an “overhang” until the issue surrounding the 1MDB loan is resolved.

Meanwhile, PKR lawmaker Wong Chen told The Edge Financial Daily that 1MDB’s failure to repay its RM2 billion loans to RHBCap and Maybank on time was very worrying.

“We wish to remind the government that the rakyat via the Employees Provident Fund (EPF), own substantial stakes in both RHBCap (41%) and Maybank (14%).

“As such, 1MDB should not be given special ‘national interest’ treatment and all dealings by the banks must be transparent and above board,” he said.

According to Wong, “legal proceedings should immediately proceed” should 1MDB miss the new Jan 30, 2015 deadline. Considering the size of the loans, he urged Maybank and RHBCap to publicly commit to this tough position to safeguard the reputation of the banking sector.

“We are also very worried about the damage this episode has on the expected March 2015 IPO (initial public offering) of 1MDB Energy (now known as Edra Global Energy).

“It sends a very negative perception of the viability of the IPO when the parent company can’t get its financial act together,” Wong said, adding that 1MDB should immediately return the Cayman Island money and use that to pay off the RM2 billion debt.

Sources told The Edge Financial Daily that the inability of 1MDB to meet its debt obligation on time showed how it is struggling with its cash flow.

Sources also said the matter was brought to the attention of Bank Negara Malaysia, whereby 1MDB chairman Tan Sri Lodin Wok Kamaruddin, director Tan Sri Ismee Ismail and former chief executive officer (CEO) Mohd Hazem Abdul Rahman were given a dressing-down by the central bank.

The 1MDB executives were told in very strong terms that they will face action if the matter is not settled.

Meanwhile, newly-appointed CEO of 1MDB, Arul Kanda Kandasamy, declared on Tuesday that his “first priority” was to undertake a comprehensive strategic review of 1MDB’s operations. He also stressed that the state investment company is a “responsible borrower”. It remains to be seen how fast this could translate into actions.

 

This article first appeared in The Edge Financial Daily, on January 8, 2015.