This article first appeared in The Edge Malaysia Weekly on May 11, 2020 - May 17, 2020

ALLIANCE Bank Malaysia Bhd’s strong focus on small and medium enterprises (SMEs) and relatively high proportion of floating-rate loans pose challenges for the lender amid the Covid-19 onslaught.

Analysts say with SMEs among the most impacted by the pandemic and ensuing Movement Control Order (MCO), potential asset quality issues could crop up at the bank, particularly after the six-month loan moratorium ends. The bank’s SME loans accounted for 27% of total loans as at end-2019 — higher than the peer average of 15%.

Analysts are also wary about asset quality deteriorating in the bank’s consumer loans, given an expected rise in the country’s unemployment rate following the Covid-19 outbreak. Even before the crisis, Alliance Bank’s gross impaired loan (GIL) ratio had shot up to 1.86% as at end-December from 1.12% as at end-March last year. The two main sources of impaired loans had been its mortgage portfolio and Alliance One Account, its loan consolidation service for consumers.

“We remain wary of asset quality issues … the problem could possibly be compounded by the MCO,” Maybank Investment Bank Research said in a report on the bank last month.

Adding to those concerns was Bank Negara Malaysia’s 50-basis-point cut in the overnight policy rate (OPR) last Tuesday, which is expected to weigh on bank margins in the near term.

Alliance Bank is particularly vulnerable to OPR cuts given its high proportion of floating-rate loans, which stood at 83% of total loans as at end-2019, and low proportion of fixed deposits over total deposits (58.2%). As at last Friday, the bank had yet to announce a downward revision of its rates.

Only three other listed banks — RHB Bank Bhd (88.6%), BIMB Holdings Bhd (91%) and CIMB Group Holdings Bhd (84.6%) — have a higher proportion of floating-rate loans. However, CIMB is not expected to be as highly impacted given that a substantial portion of its loans are overseas and thus, not subject to the rate cuts at home.

The OPR has already been cut by a total of 100 bps so far this year, to 2%, and some research houses such as CGS-CIMB Research expect Bank Negara to cut it by another 25 bps in the second half to further support the economy in this difficult time.

“Based on our analysis, Alliance Bank and BIMB are the most sensitive to the OPR cuts,” says CGS-CIMB, which cut its projected net profit for Alliance Bank by 25% to 31% for the financial years ending March 31, 2021 (FY2021) and FY2022.

Nevertheless, it points out that Bank Negara’s recent move in allowing banks to use Malaysian bonds and investment issues to meet the statutory reserve requirements (SRR) from May 16, 2020, to May 31, 2021, could help provide a slight boost to the bank’s net profits as it will be able to earn additional interest income from those holdings.

What the bank says

Alliance Bank is taking these concerns in its stride and says it expects to stay resilient despite the challenges ahead.

“Clearly, this is a period of stress for the economy and will result in higher credit costs. We believe this will be manageable. We are focused on helping our clients get through this so that they can emerge with their business and personal finances as healthy as possible,” says the bank in an email response to questions from The Edge.

At present, it provides relief with the moratoria and various restructuring solutions.

It says customers who are worried about payment affordability are encouraged to reschedule and restructure their loan payments. In addition, it is also helping its SME customers with a special relief facility (SRF). To date, it has approved close to RM500 million in financing under the SRF.

“We are also supporting our small local businesses as much as possible,” it says, adding that the bank recently launched the #SupportLokal initiative to help small local businesses continue generating revenue or scale up their business via e-commerce during the MCO period. Business owners also have access to advisory and training via webinars and videos to help them succeed in their new digital ventures.

“Historically, Malaysia has been very resilient to its various economic cycles, and we do not expect this to be any different,” it says.

As for OPR cuts, Alliance Bank says such cuts are part of the ups and downs of the economic cycle and that it expects to be able to manage them as part of the ordinary course of business.

“OPR cuts are the prerogative of Bank Negara and we do not speculate on them. For every OPR cut of 25 bps, we expect the net short-term impact to be 5 bps to our net interest margin (NIM). We continue to mitigate longer-term OPR cut impact by repricing our deposits and optimising our asset mix. We also benefit from value improvements of our bond holdings,” it says.

The bank’s NIM stood at 2.38% as at the third quarter ended Dec 31, 2019, one of the highest in the industry.

“At the end of the third quarter, we had provided NIM guidance of 2.37% for the full financial year ending March 31, 2020 (FY2020), and expect to close marginally higher than that,” it says.

Alliance Bank adds that during the six-month moratorium from April to September, it will continue to earn interest income for almost all of its products except for hire purchase (HP) and personal loans, which represent less than 6% of its portfolio. “Our deposit base remains healthy and continues to grow.”

Analysts say Alliance Bank will be the least affected by the Ministry of Finance’s announcement last week that banks won’t charge additional interest on HP instalments that are deferred over the moratorium period. This is because its HP exposure is small, at about 1.5% of total loans.

So far, a quarter of its SME customers have chosen not to take up the moratorium offer.

“We continue to reach out to our customers — individuals and businesses — to ensure that they are well informed on the implications of their choices. If they are able to continue servicing their loans, that would clearly be the most economic choice because there is no additional interest charged. Today, a quarter of our SME customers have chosen to continue with their loan repayments,” it says.

It has low exposure to sectors that are directly impacted by the Covid-19 outbreak.

“While the hospitality, tourism, food and beverage, retail, oil and gas, and airline industries represent only 2% of our portfolio, clearly with the MCO, many more are being affected. We have reached out to all our business banking customers who may be affected to see how we can help,” the bank says.

Alliance Bank did not provide guidance on loan growth for FY2020 or FY2021. “At the moment, there is too much economic uncertainty to provide a clear view of loan growth. We continue, of course, to serve the financing needs of our clients.” In 9MFY2020, loans grew 5% year on year to RM43.5 billion, outpacing the industry’s 3.9% growth.

As for dividends, the bank says the payout will be “commensurate with profit, and take into account economic uncertainties”.

Its 9MFY2020 net profit fell 23.4% y-o-y to RM326.21 million, mainly owing to higher credit losses. However, revenue grew 3.4% y-o-y to RM1.26 billion. Its dividend per share fell to 6 sen from 8.5 sen a year ago.

The stock, which has shed 21.3% year to date, closed at RM2.07 last Friday, giving it a market capitalisation of RM3.2 billion. Analysts mostly have either a “buy” or “hold” call on it, with target prices ranging from RM1.90 to RM2.90.

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