RAM Ratings: Firm state support underpins Sabah Development Bank’s AA1/Stable ratings

Published on 05 December 2016

RAM Ratings has reaffirmed the ratings of Sabah Development Bank Berhad’s (SDB or the Bank) outstanding debt programmes at AA1/Stable/P1. The reaffirmation is anchored by our anticipation of firm support for the Bank from the Sabah State Government given its developmental role in the State.

SDB has completed an internal restructuring exercise which entailed a de-merger and transfer of its non-banking businesses to various newly incorporated companies held under Sabah Development Berhad, a diversified holding company wholly owned by the Sabah State Government. The exercise minimises risks arising from non-banking activities especially the Bank’s O&G operations. That said, the Bank may still face credit risks associated with related-party lending, which accounted for 18% of total lending as at end-December 2015.

As a policy bank, SDB may be exposed to higher-risk credits. Given uncertain economic conditions, the Bank will focus instead on state-related financing. As at end-December 2015, healthy recoveries and a large write-off contributed to an improved, albeit still high, gross impaired-loan ratio (on a 6-months-past-due basis) of 7.7% (end-December 2014: 10.8%). Its loan-loss coverage stood at 110.1% as at end-December 2015, and would be substantially lower if loans 3 months past due, not classified as impaired (which accounted for 31% of total lending as at the same date) were taken into account. Tier-1 capital ratio stood at 15.6% as at the same date. Notably, as SDB is not regulated by Bank Negara Malaysia, its provisioning and impairment policies are not comparable with banking industry norms.

SDB relies heavily on wholesale funding in view of its limited deposit-taking ability. As at end-December 2015, wholesale borrowings mostly in the form of short-tenured debt securities of up to 3 years, made up 67% of interest-bearing funds. This renders the Bank highly vulnerable during periods of tight liquidity. On balance, about 73% of SDB’s gross loans have a maturity period of 3 years or less. Furthermore, SDB’s close relationship with the Sabah State Government provides some assurance.

Instrument	Rating action	Rating
CP Programme of up to RM1.5 billion in nominal value (2014/2021) and MTN Programme of up to RM1.5 billion in nominal value (2013/2033)#	Reaffirmed	AA1/Stable/P1
CP Programme of up to RM1 billion in nominal value (2013/2020) and MTN Programme of up to RM1 billion in nominal value (2012/2032)*	Reaffirmed	AA1/Stable/P1
CP Programme of up to RM3 billion (2012/2019) and MTN Programme of up to RM3 billion (2011/2036)^	Reaffirmed	AA1/Stable/P1
RM1,000 million MTN Programme (2008/2028)	Reaffirmed	AA1/Stable
#The aggregate outstanding CP and MTN cannot exceed RM1.5 billion at any time. *The aggregate outstanding CP and MTN cannot exceed RM1.0 billion at any time. ^The aggregate outstanding CP and MTN cannot exceed RM3.0 billion at any time.

Analytical contact                                            Media contact
Chan Yin Huei                                                    Padthma Subbiah
(603) 7628 1180                                                 (603) 7628 1162
yinhuei@ram.com.my                                        padthma@ram.com.my