Up to 49% profit cut seen for banks


  • Banking
  • Tuesday, 31 Mar 2020

According to Maybank IB Research banking analyst Desmond Ch’ng, this possible worst-case scenario assumes four overnight policy rate (OPR) cuts this year, flat loan growth and a spike in credit costs.

PETALING JAYA: A worst case scenario for banks in Malaysia amid the current Covid-19 situation, could see up to a 49% slash in profit estimates.

According to Maybank IB Research banking analyst Desmond Ch’ng, this possible worst-case scenario assumes four overnight policy rate (OPR) cuts this year, flat loan growth and a spike in credit costs.

“This would induce a 23% to 49% cut in our current profit estimates and a revision to target prices that would be on average 29% lower than present share prices, “ he told clients in a report yesterday.

That said, what is a worst-case scenario, is a difficult question to answer, Ch’ng wrote.

“There are too many variables, of which the biggest unknown is just how long Covid-19 will persist.

“This is compounded by an oil crisis with oil prices having fallen to a multi-year low of US$28 per barrel now from an average of US$64 per in 2019, “ he added.

He noted that banks were entering this period of volatility from a position of strength in that capital ratios are a lot higher than they were during the Global Financial Crisis while asset quality is much better and provision levels more, comfortable.

“On the flip side though, loan growth today is much more subdued and margins much thinner thus sustaining profitability is more challenging.”

With major economies now at the brink of recession due to the Covid-19 outbreak, banks often seen as proxies to economies globally, are one of the sectors to be hit.

However, the sector is still considered one of the more resilient ones in these trying times due to their solid capital base.

“Banks today are entering the current turmoil from a position of strength in that their asset quality is stronger than before, with an average gross impaired loan ratio of just 2% as at end-2019 versus 5% in 2007, for the banks in our coverage.

“Moreover, average loan loss coverage including regulatory reserves for these banks stands at a comfortable 108% versus 78% in 2007, ” Ch’ng said. 


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