Friday, June 27, 2014

MARC AFFIRMS BANK PEMBANGUNAN’S FINANCIAL INSTITUTION AND CP PROGRAMME RATINGS AT AAA AND MARC-1ID/MARC-1 RESPECTIVELY


Jun 25, 2014 -

MARC has affirmed its AAA financial institution rating on Bank Pembangunan Malaysia Berhad (Bank Pembangunan) and MARC-1ID / MARC-1 programme ratings on the bank’s Islamic and/or Conventional Commercial Papers (CP) Programme of up to RM2.0 billion with a stable outlook.

The ratings reflect the support from the Government of Malaysia to Bank Pembangunan stemming from the bank’s status as a wholly government-owned development financial institution (DFI) and its role in extending financing to key growth sectors identified by the government. The support from the government has been demonstrated by government guarantees extended to the bank’s lenders, government compensation for interest income and the provision of an infrastructure support fund that can be utilised to mitigate credit losses on infrastructure loans. The ratings also incorporate the bank’s strong capitalisation levels, adequate earnings and satisfactory funding and liquidity profile.

In line with its developmental objectives, Bank Pembangunan’s loan portfolio is spread among four key sectors: infrastructure, maritime, oil and gas and technology. Of these, the infrastructure sector – which includes utilities, transportation, highways and ports among others - accounts for a sizeable 83% of the bank’s RM25.7 billion loan portfolio as at end-September 2013 (end-December 2012: RM25.2 billion). Gross loan growth continue to show signs of moderating, recording 1.8% in the nine-month financial period ended September 30, 2013 (9M2013) (2012: 1.9%; 2011: 5.3%), with the growth coming from the oil and gas and maritime sectors to offset the decline in infrastructure loans. Nonetheless, the bank has extended its credit-wrapped facilities to the infrastructure sector with approved credit-wrapped facilities increasing to RM2.1 billion in 2013 as compared to RM0.2 billion in 2012.

MARC notes that Bank Pembangunan continues to extend financing to some projects with high risk owing to their high economic impact under the government development agenda. This is largely reflected by the bank’s overall gross impaired loan ratio of 11.0% as of end-September 2013 (end-December 2012: 10.3%), which is significantly higher than that of the Malaysian banking industry of 1.8%. The bank’s ratio deteriorated in 9M2013 on an increase in gross impaired loans, which was primarily attributed to a significantly lower amount of write-offs (9M2013: RM17.8 million; end-December 2012: RM557.0 million) relative to new impairments (9M2013: RM457.9 million; end-December 2012: RM688.6 million). MARC views the lower impairment charges during 9M2013 to reflect the bank’s moderate concerns on potential losses from impaired loans; loan loss reserve coverage declined to 84.4% as at end-September 2013 (end-December 2012: 88.8%). The majority of its existing loans to the infrastructure projects are government-backed which carry some form of government support. The bank’s increasing exposure to the maritime, and oil and gas sectors, however, could affect its asset quality going forward.

Bank Pembangunan’s strong capitalisation mitigates the higher credit risk the DFI assumes. The bank’s core capital ratio (CCR) and risk-weighted capital ratio (RWCR) stood at 33.3% and 35.3% respectively as at end-September 2013 (end-December 2012: 35.0%; 37.4%) due to the increase of loans to the maritime and the oil and gas sector. MARC draws comfort from the bank’s high core capitalisation with Tier 1 capital, which comprises share capital and reserves, accounting for about 94% of the total capital base.

Bank Pembangunan posted a higher net profit of RM401.8 million for 9M2013 (9M2012: RM230.6 million) mainly due to lower allowances for impairment of loans and financing and higher net finance income from the Islamic banking business. Impairment charges were significantly lower at RM77.4 million compared to RM251.3 million in 9M2012. Net finance income from the Islamic banking business increased by 32.4% year-on-year to RM193.4 million, which resulted in higher consolidated net interest income. The slight increase in the bank’s net interest margin is due to lower interest expenses on short-term borrowings. MARC opines that the bank’s pre-impairment profitability will continue to support its adequate earnings generation capability.

The rating agency notes that Bank Pembangunan has sufficient existing facilities to meet its funding requirements in 2014. For its upcoming maturity of large borrowings, the bank is in the midst of concluding additional financing which will be underpinned by funding support from the government.

The stable outlook reflects MARC’s expectations that Bank Pembangunan’s strong capital position and support from the government should mitigate any concern on deterioration in asset quality and that profitability will remain adequate.

Contacts:
Se Tho Mun Yi, +603-2082 2263/ munyi@marc.com.my;
Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.

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