RAM Ratings assigns AA1 and P1 ratings to Sabah Development Bank’s proposed debt facilities, with stable outlook

Published on 22 June 2012

RAM Ratings has assigned long- and short-term issue ratings of AA1 and P1 to Sabah Development Bank Berhad’s (“SDB” or “the Bank”) Proposed Commercial Papers Programme (“CP”) of up to RM1 billion in nominal value and Proposed Medium-Term Notes Programme (“MTN”) of up to RM1 billion in nominal value; the aggregate outstanding nominal value of the CP and MTN cannot exceed RM1 billion at any time. Concurrently, the existing issue ratings of SDB have also been reaffirmed (refer to Table 1). All the long-term ratings have a stable outlook.

SDB is a development financial institution (“DFI”) that is fully owned by the Sabah State Government (“State Government”, whose debt facility is rated AAA/Stable/P1 by RAM Ratings). Given its position as one of the State Government’s funding conduits, the Bank plays a strategic role in supporting its parent’s development goals. Meanwhile, the State Government has been supportive of SDB’s operations, with large deposit placements and Letters of Support for its debt securities.

Given the nature of its business, some of SDB’s loans may entail higher risk, although they are adequately secured. As at end-December 2011, SDB’s gross impaired-loan ratio stood at 12.5%. Meanwhile, we also note that the Bank is exposed to the private sector, where lending is mainly directed at the real-estate segment. We will continue monitoring SDB’s increasing commercial exposures in relation to its role as a DFI.

As at end-December 2011, SDB’s tier-1 risk-weighted capital-adequacy ratio stood at 20.0%. Given the Bank’s sizeable past-due loans and relatively low loan-loss reserve coverage, its capital loss-absorption capacity is deemed adequate. At the same time, SDB is heavily dependent on wholesale borrowings, which exposes it to roll-over risk that is compounded by the Bank’s very low holdings of liquid assets. Nonetheless, we expect the State Government to provide ready liquidity and capital support if needed, given SDB’s strategic importance to the State.

Table 1: SDB’s debt instruments

Instrument	Rating action	Long-term rating	Short-term rating	Rating outlook
Proposed CP of up to RM1 billion in nominal value and Proposed MTN of up to RM1 billion in nominal value*	Assigned	AA1	P1	Stable
CP of up to RM1 billion (2012/2019) and MTN of up to RM1 billion (2011/2031)*	Reaffirmed	AA1	P1	Stable
RM500 million CP (2008/2015) and RM1 billion MTN (2008/2028)*	Reaffirmed	AA1	P1	Stable
Note: * The aggregate outstanding CP and MTN of the relevant debt issues cannot exceed RM1 billion at any time.

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Amy Lo
(603) 7628 1078
amy@ram.com.my