MARC has affirmed its financial institution (FI) ratings of AAA/MARC-1 on Malayan Banking Berhad (Maybank) and concurrently affirmed the AAA rating on the bank’s RM10.0 billion Senior Medium-Term Note (MTN) programme. The outlook on the ratings is stable.
The ratings affirmation incorporates Maybank’s very strong market position in loans and deposits, underpinned by its well-established banking franchise as the largest domestic bank. The bank maintains a healthy funding profile and a strong capital position which provides a buffer against weakening asset quality metrics. The ratings assessment considers the consolidated group profile given the strong interlinkages between the bank and its subsidiaries.
At the bank level, Maybank’s loan book of RM299.8 billion is split between domestic (46.9%) and foreign (53.1%) as at end-March 2017 (1Q2017). Singapore remains a key overseas market for the bank, accounting for 41.3% of the total loan book as at end-March 2017. The bank’s overall loan growth improved during this period to 9.2% y-o-y (2016: 3.2%); excluding foreign exchange effects, loan growth was 2.9% y-o-y (2016: 1.0%). The higher loan growth was supported by improving economic conditions in Malaysia and Singapore, although loan growth is expected to remain moderate over the intermediate term.
As at end-1Q2017, the bank’s gross impaired loan ratio rose to 2.58% from 2.39% as at end-December 2016, partly due to the bank’s pre-emptive restructuring and rescheduling of loans that have shown early signs of weaknesses. These include loans related to the oil and gas sector which accounted for about 4% of total loans. MARC is of the view that new impaired loans could rise, given the slow recovery in the oil and gas sector. The bank’s loan loss reserve ratio was relatively unchanged at 73.1% as at end-March 2017 (2016: 74.3%). Maybank maintains a strong capital position, which mitigates asset quality risk.
The bank’s common equity Tier 1 (CET1) and total capital ratios stood at 14.0% and 19.1% respectively as at end-March 2017 (2016: 15.9%; 19.4%). The capital ratios remain higher than the domestic industry average of 13.1% and 17.0% respectively. Nonetheless, the implementation of the Malaysian Financial Reporting Standard (MFRS) 9 on January 1, 2018 could result in lower capital ratios, although the bank is well-positioned to absorb the impact from the change in the accounting rule. Maybank’s capital base is likely to continue to benefit from a well-received dividend reinvestment plan, registering a reinvestment rate of above 80% since the initiation of the plan in 2010. Additionally, the bank is expected to maintain its prudent approach in managing risk-weighted assets (RWA) as reflected by slower RWA growth relative to asset growth in the past four years.
In 2016, Maybank’s pre-tax profit grew by 5.2% y-o-y to RM7.3 billion, boosted by a one-off gain on asset disposals and improved cost efficiency. These factors had offset the impact from higher impairment charges, moderate loan growth and lower net interest margin (NIM). Due partly to a decline in the overnight policy rate in July 2016, the bank’s NIM fell to 1.82% in 2016 from 1.95% from the previous year, but recovered to 1.91% during 1Q2017. MARC notes that the bank has strengthened its cheaper funding base, as reflected by an increase in its CASA-to-total deposit ratio to 39.9% as at end-March 2017 (2015: 34.9%). The bank’s funding and liquidity profile has remained healthy, although its loan-to-customer deposit ratio has increased slightly to 91.5% in 1Q2017 (2016: 89.3%).
At the group level, Maybank’s consolidated net profit rose by 20.3% y-o-y to RM1,745.1 million in 1Q2017, underpinned by stronger earnings from its insurance subsidiaries as well as its Islamic and Indonesian banking subsidiaries. While Maybank Indonesia registered a higher net interest income, its non-performing loan ratio rose to 3.8% as at end-June 2017 (2016: 3.6%), with the increase mainly coming from the small and medium-sized enterprises and business banking segment. MARC also notes that Maybank Indonesia’s loan loss reserve ratio remained low at 48.8% (2016: 50.4%); however, its strong capital position, as reflected by its CET1 capital ratio of 13.5% as at end-June 2017 provides some buffer against potential asset quality deterioration.
The stable ratings outlook reflects MARC’s expectations that Maybank will sustain its credit profile by prudently managing its loan portfolio and maintaining its capital position against moderate economic growth.
Contacts: Joan Leong, +603-2717 2934/ firstname.lastname@example.org Sharidan Salleh, +603-2717 2954/ email@example.com.
August 4, 2017