RAM Ratings has reaffirmed the P1 rating of AEON Credit Service (M) Berhad’s (AEON Credit or the Company) Islamic CP Programme of up to RM1 billion. The rating is anchored by our expectation of a high likelihood of extraordinary support from the Company’s ultimate parent, AEON Co., Ltd. (AEON Co or the Group), given AEON Credit’s fit with the Group’s broader strategy of expanding and diversifying its revenue base in Asia. I

Published on 10 Jul 2017.

RAM Ratings has reaffirmed the P1 rating of AEON Credit Service (M) Berhad’s (AEON Credit or the Company) Islamic CP Programme of up to RM1 billion. The rating is anchored by our expectation of a high likelihood of extraordinary support from the Company’s ultimate parent, AEON Co., Ltd. (AEON Co or the Group), given AEON Credit’s fit with the Group’s broader strategy of expanding and diversifying its revenue base in Asia. In the latest financial year, the Company contributed 15% of the pre-tax earnings of AEON Financial Service Co., Ltd. (AFS Co) – its immediate parent and the financial-services arm of the Group.

AEON Credit represents AFS Co’s footprint in Malaysia, and has an established franchise in the domestic consumer financing market. Motorcycle, automobile and personal financing comprised the bulk of its net financing, which increased 19% y-o-y to RM6.4 billion as at end-February 2017 and further augmented to RM6.7 billion as at end-May 2017. Underscored by its business expansion, the Company’s profitability has been sturdy with an annualised ROA and ROE of 5.6% and 41.1% in 1Q fiscal 2018 (fiscal 2017: 5.3% and 40.4%) – computed based on pre-tax profit. Nonetheless, these key profitability indicators have been declining over the last 5 years from a respective 9.1% and 47.0% in fiscal 2013. AEON Credit’s net interest margin (NIM) shows a similar trend as the Company has been underwriting more lower-yielding products in recent years, which has resulted in asset quality improvements. 

Nonetheless, AEON Credit’s annualised credit-cost ratio of 3.3% in 1Q fiscal 2018 and fiscal 2017 (fiscal 2016: 4.3%) – while high – has remained stable; with a large proportion of lower-income borrowers and unsecured financing in its portfolio. The Company has largely factored in the higher credit risks into the pricing of its products – its average NIM of 14.8% in the last 5 years has afforded it some headroom to absorb heftier credit costs.

The Company’s gearing level stayed high, as a result of its dependence on wholesale funding. As at end-February 2017, AEON Credit’s adjusted gearing ratio stood at 6.0 times (end-February 2016: 6.6 times), which is still above those of some of its peers. We expect the Company’s gearing ratio to ease to 4.9 times following the completion of its rights issue, which is targeted for completion by 3Q 2017. Elsewhere, the Company’s liquidity profile has remained favourable; its cash balances and unutilised credit provide more than 3 times’ coverage of its short-term debts. 

Analytical contact
Loh Kit Yoong
(603) 7628 1031
kityoong@ram.com.my

Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my