Alliance Bank expects OPR cut to compress NIM by up to 10bps


ALLIANCE Bank Malaysia Bhd said the reduction of the Overnight Policy Rate (OPR) could erase as much as 10 basis points (bps) of the lender’s net interest margin (NIM) for the financial year ending March 31, 2020 (FY20).

Group CEO Joel Kornreich (picture) said the lender’s profit will be “undoubtedly affected” by the OPR cut which was reduced by 3% to 25bps in March this year.

“There’s no doubt the OPR cut has an effect on revenue and profit, but we continue to shift to higher risk-adjusted return (RAR) loans, so that will dampen the effect on the net interest margin (NIM).

“We ended FY19 with a NIM of 2.5%. So, we expect to end FY20 between 2.4% and 2.45%. There will be some effect (from the OPR), but we can manage most of it,” he said after the group’s AGM in Kuala Lumpur yesterday.

He said the lender will mitigate the NIM compression by increasing its loan books.

The lender is expecting a “significant” revenue and loan expansion this year. It’s aiming for 7% loan growth in FY20 — to be driven by its small and medium enterprises (SMEs) businesses, after the lender’s loan book rose 6% in FY19, but still fell short of the 10% target.

Kornreich said the lower loan performance last year was largely due to a “substantially lower” loan demand for commercial and corporate borrowings, especially due to delays or cancellations of key mega infrastructure projects.

“While the economy is experiencing some level of slowdown and some companies are experiencing some stress, the slowdown is not so sharp and Malaysia has always been able to (weather) that,” he said, adding that the bank continues to monitor its portfolios “very vigilantly”.

The bank has allocated RM50 million in capital expenditure (capex) for digitalisation efforts in FY20, which will include continued digital initiatives to support its SME segment, while the overall capex allocations in FY19 and FY18 amounted to RM80 million and RM73 million respectively.

Meanwhile, it is exploring the possibility of partnering non-bank players to widen its distribution network, although it has no plans to apply for a virtual banking licence.

Kornreich said “there isn’t very much of a benefit” to the bank — currently the smallest of Malaysia’s top eight lenders — if it was to apply for a virtual banking licence, given that it’s already providing digital banking services.

“So for us, there’s really no added value. However, if we were to enter into partnership with another non-bank company, it is possible that it might become useful through another vehicle, but that’s not something that’s on the cards yet.

“We’re definitely talking to potential partners. But that doesn’t mean we’re applying for a virtual bank licence,” he said without revealing the parties the lender is talking to.

He believes virtual banks, if allowed to set up shops in Malaysia, would likely form partnerships as scaling up “from nothing, in my view, is not a trivial proposition. It is quite a costly affair”.

Bank Negara Malaysia is expected to have a virtual banking framework ready by the end of 2019, which would open up the already-saturated domestic landscape to lenders that operate without physical branches.

Current frontrunners in the virtual banking space include Hong Kong, which has issued eight licences so far to players such as Ant Financial Services Group, Xiaomi Corp and Tencent Holdings Ltd, while Singapore is also set to hand out up to five digital banking licences.

Virtual banks would pose a challenge and would obviously increase the competition, he said.

“We know from our market and other markets that the first areas where competition intensifies are payment services, and the folks who entered those are always also interested — over time — in providing lending services.

“I think all of this will play out over the next few years. Competition will always be there and continue to intensify. The only thing we can do is to make sure we’re the best choice,” Kornreich said.

* The article has been edited and rectified for clarity.