This article first appeared in The Edge Financial Daily on July 18, 2017

Banking sector
Maintain neutral: Alam Maritim Resources Bhd (AMR) missed the sukuk principal payment of RM30 million that was due on July 6. AMR is the second oil and gas (O&G) corporate in Malaysia that has shown difficulties in servicing its debt; Perisai Petroleum Teknologi Bhd defaulted on its bond repayment in October 2016.

While the sukuk holders could be partly non-bank financial institutions, the non-repayment of the sukuk could trigger the classification of banks’ lending to AMR, even if the company is still paying these loans promptly.

Based on our observations, the default by Perisai did not have any material impact on banks’ earnings. The biggest impact that banks have suffered so far for their exposure to O&G companies was the RM452 million impairment losses incurred by two banks for their exposure to Swiber Holdings Ltd’s bonds in Singapore in the second quarter of 2016.

As shown in the company’s first quarter of financial year 2017 (1QFY17) results, AMR had total borrowings of RM149.3 million as of March 2017 — RM75 million sukuk and RM74.3 million bank borrowings. As we gather from AMR’s FY16 annual report, its bankers are Malayan Banking Bhd (Maybank) and Maybank International (L) Ltd.

Assuming that the RM74.3 million bank borrowings are extended by Maybank and the loans are classified as impaired, the loan loss provisioning from this would trim Maybank’s FY17 net profit by a miniscule 0.4%, based on the assumption that the provision is 50% of the exposure.

Impact on the sector’s net profit (for banks under our coverage) would be at a negligible 0.1%. The impact on Maybank and the sector would be even smaller if the loans have been classified as restructured and rescheduled (R&R) loans.

Adding the assumed RM74.3 million exposure to AMR would increase Maybank’s gross impaired loans (GILs) by only 0.6%. This would only push up its GIL ratio by one basis point to 2.41% as at end-March 2017. This would only increase the industry’s GILs by 0.3%. There would not be any impact on banks if the loans have been classified as R&R loans previously.

The potential impairment loss/provision for exposure to AMR would be negative for banks, but the impact would not be significant, based on our assessment. Despite the potential rate hike in 2018, we remain “neutral” on banks, due to the negative impact from the adoption of Malaysian Financial Reporting Standards 9, weaker net profit growth in 2018 and unattractive valuations.

Upside risks to our call are better-than-expected loan and fee income growth, while the key downside risk is a spike in impaired loans. — CIMB Research, July 15