DESPITE higher revenue and net income, Alliance Bank Malaysia Bhd — the smallest of eight local lenders — saw its net profit plunge 44% to RM76.69 million in the first quarter ended June 30, 2019 (1QFY2020), down from RM136.37 million a year ago.

In a filing with Bursa Malaysia on Aug 27, the bank blamed its weaker profitability on “expected credit losses stemming from the impairment of a few large accounts”, as well as continued investment in IT infrastructure to support its transformation initiatives.

Interestingly, in a press statement dated the same day, Alliance Bank also revealed that it had made a full provision and impairment amounting to RM74.9 million for the few large accounts. The bank further said it has since initiated recovery actions on the affected accounts.

This leads to the question of which borrowers dragged down Alliance Bank’s bottom line in 1QFY2020.

One name that has come up is London Biscuits Bhd, a homegrown cake and snack food producer that has been thrust into the limelight for the wrong reasons lately.

Recall that London Biscuits had in June 2016 announced the establishment of its unrated medium term notes (MTN) programme of RM100 million.

The appointed principal adviser for this programme is none other than Alliance Investment Bank Bhd, the investment banking arm of locally listed Alliance Bank.

To recap, the proceeds raised from London Biscuits’ MTN programme were to be utilised for refinancing existing bank borrowings and to finance capital expenditure and working capital requirements, including the costs of maintaining existing plant and machinery and other general corporate purposes.

The MTN has a maturity period of three to seven years from the first issue date of July 26, 2016.

London Biscuits, after servicing interest payments in the first two years, should have started making principal repayment from the third year onwards, which is this year.

But given the current parlous state of the confectionary maker, it is not likely to meet its obligation under the MTN programme.

And that, naturally, has turned the spotlight on Alliance Bank, whose net credit cost increased quarter on quarter by 3.6 basis points (bps) to 13.1 bps in 1QFY2020.

The bank’s gross impaired loan ratio also increased 18 bps to 1.30%, up from 1.12% in 4QFY2019.

Bankers whom The Edge spoke to are of the view that Alliance Bank’s exposure to London Biscuits could be one of the reasons for its weaker earnings performance in 1QFY2020.

“It could be true. Alliance Bank may be one of the lenders for London Biscuits, but the latter does not have the means to pay off its debts now,” says an investment banker.

Given that Alliance Investment Bank is the appointed principal adviser for the MTN programme, one source from a local bank believes Alliance Bank would have a certain exposure to London Biscuits.

“As to how big the exposure is and whether it is direct or indirect, that we don’t know for sure. The industry norm is that the principal adviser will usually take up a certain portion because it has to ensure that the MTN is fully subscribed,” says the source, who prefers to remain anonymous.

When contacted, Alliance Bank, said in a brief email reply, “Alliance Bank does not comment on specific client accounts. The bank remains vigilant in managing its credit portfolio and prudent in its provisioning.”

The source from the local bank, however, points out that Alliance Bank, as a group, is estimating credit losses of over RM50 million from London Biscuits.

“Other than the MTN, I believe Alliance Bank also provides trade line, bankers’ acceptance, trust receipt and invoice financing to London Biscuits,” says the source.

It is also learnt that London Biscuits has trade facilities with a limit of close to RM9 million, which have almost been fully utilised.

In other words, the rest of the expected credit losses portion is very likely to have arisen from the MTN programme.

London Biscuits recently announced that it had defaulted on a RM9.83 million banking facility from the Bank of Nova Scotia on July 3. Following the default, London Biscuits fell into Practice Note 17 status on July 9.