Maybank’s 1Q earnings up, but warns of ‘uncertain’ future

The MCO extension, crippling businesses, rising unemployment and several OPR cuts would hurt its revenues


MALAYAN Banking Bhd’s (Maybank) net profit rose 13.3% to RM2.05 billion in the January through March period, but warned that the impact of the coronavirus pandemic would be felt in future earnings.

Malaysia’s largest bank based on assets did not feel the brunt of the Covid-19 outbreak as the country’s stay-home order and the shuttering of businesses only came into effect in the last two weeks of the first quarter of 2020 (1Q20).

But the extension of the stay-at-home order, crippling businesses, rising unemployment and several Overnight Policy Rate (OPR) cuts would hurt Maybank’s revenues. The country’s economy is expected to be in recession this year and will be dealing with more bad debts.

Maybank, the country’s biggest stock based on market capitalisation, recorded a 2% increase in revenue to RM13.22 billion in 1Q20 compared to RM12.98 billion posted a year ago.

“We expect the operating environment for the rest of 2020 to remain uncertain and sensitive to the kinetics of the pandemic, as well as the outlook for treatment and vaccines, which will have implications to public health and economic policies,” said group president and CEO Datuk Abdul Farid Alias.

Signs of rising bad debts are already showing. The bank’s allowances for impairment losses on loans, advances, financing and other debts rose by 59.2% or RM357.7 million to RM961.7 million in the quarter under review compared to 1Q19. The bank said due to the “softer economic landscape”, it plans to proactively engage its customers to address potential asset quality weaknesses.

The bank is anticipating that the asset quality will be further compromised once the moratorium period on loan and financing repayments ends in September.

The government allowed a six-month borrowings and financing moratorium to cushion the financial fallout from the pandemic which had claimed more than 100 lives in Malaysia.

But with rising unemployment and a slowing economy, banks are already expecting their bad debts to mount from this year.

The bank, which is substantially owned by Permodalan Nasional Bhd, is also revising its return on equity of 10%-11% for the financial year 2020.

“Given the significant weakening outlook in the economic landscape arising from the Covid-19 pandemic and evolving developments in the marketplace, the group will need to re-evaluate its headline key performance indicator and will provide an update once the impact can be ascertained,” it added.

Analysts are generally negative on the sector as the economy slows and the flurry of borrowing rate cuts will thin income even more, especially for banks that have a big exposure to interest income.

The central bank had cut borrowing rates four times in the last 12 months, erasing 125 basis points and pushing the lending rate to more than 10-year low.

MIDF Amanah Investment Bank Bhd senior analyst Imran Yassin Mohd Yusof said the impact to the group’s asset quality will likely manifest in the 2Q and 3Q as the Movement Control Order (MCO) was only enforced towards the end of March.

Imran said there was also the weakness in the group’s net interest income due to “tepid” loans growth and net interest margin compression.

He said provisioning was also higher as the group decided to absorb additional provisioning due to the uncertain operating environment caused by the pandemic.

“Despite all the weaknesses, it managed to record a higher net profit as non-interest income grew strongly on the back of trading gains and mark-to-market gains in derivatives,” he said to The Malaysian Reserve.

He said there is also a likelihood that depositors will “run down its current account and savings account” for their cashflow needs.

But he said MIDF remains positive of the banking group due to its size despite a higher bad debt provision.

Investors, however, did not leap for joy to the news of the profit increase. Shares of the fourth-largest bank in South-East Asia added two sen to close at RM7.51.