Coronavirus will have little impact on Malaysian banks: analyst

Overnight policy rate cut and the 2019 nCov dented the sector.

The impact of the novel coronavirus on Malaysian banks’ growth is expected to be moderate, reports UOB Kay Hian, as they draw parallels with the impact of the 2003 SARS outbreak on the industry.

“In assessing the potential impact of the on-going Wuhan virus on the banking sector, we looked back at the impact of SARS on the sector and noted that the impact on pre-provision operating profit and earnings was marginal, if any, as GDP growth expanded at a faster 5.4% in 2003 (SARS period) [compared to] 4.4% in 2002,” said UOB Kay Hian analyst Keith Wee Teck Keong.

Also read: Chart of the Week: Malaysia's loan growth halved to 3.9% in 2019

“As such, the sector recorded a relatively healthy 7.4% YoY growth in pre-provision operating profit and a much stronger 27% YoY net profit growth on the back of lower provisions.”

But the sector’s performance will likely remain muted in H1 2020, although it may not decline to the extent it did during SARS as the current valuation is near its 10-year historical trough, he added.

UOB Kay Hian made two key observations about the SARS crisis’ impact on local banks, which they used as a parallel to the recent outbreak. One is that lan growth-to-GDP ratio moderated slightly to 0.90x in 2003 compared to 1.0x in SARS. The second is that SARS clearly impacted sentiment on the sector, with the sector price-to-book (P/B) ratio declining 13% from November 2002 to April 2003 (vaccine discovered).

Further, recovery began from early June 2003 (+32%), a month before the World Health Organisation announced that the virus was contained.

Overall, Malaysia’s banking sector has declined 4% year-to-date (YTD) on the back of the overnight policy rate (OPR) cut and the novel coronavirus outbreak, reports UOB Kay Hian.

Bank Negara Malaysia cut the OPR rate by 25 basis points (bp) to 2.75% on January 2020, a nine-year low. Meanwhile, the outbreak of a novel strain of coronavirus that originated from Wuhan, China has resulted in more subdued forecasts for banking industries across Asia. Banks even opted to temporarily close branches in a bid to protect their employees and customers.