RAM Ratings assigns preliminary A3 rating to Bank Muamalat's proposed sukuk, reaffirms A2/P1 financial institution ratings

RAM Ratings (09 May 2011): RAM Ratings has reaffirmed Bank Muamalat Malaysia Berhad’s (Bank Muamalat or the Bank) respective long- and short-term financial institution ratings at A2 and P1; the rating of the Bank’s RM250 million Islamic Subordinated Bonds (2006/2016) has also been reaffirmed at A3. Concurrently, RAM Ratings has assigned a preliminary long-term rating of A3 to the Bank’s Proposed Islamic Subordinated Sukuk Programme of up to RM400 million (Proposed Subordinated Sukuk). All the long-term ratings have a stable outlook. The 1-notch difference between Bank Muamalat’s A2 long-term financial institution rating and the A3 ratings of its Proposed Subordinated Sukuk and RM250 million Islamic Subordinated Bonds reflects the subordination of the debt facilities to the Bank’s senior unsecured obligations.

Bank Muamalat’s credit fundamentals remained intact during the period under review. In April 2010, the Bank adopted Financial Reporting Standard 139 on recognition criteria for impaired financing. As at end-December 2010, its gross impaired-financing ratio worked out to 5.2% (restated ratio as at end-March 2010: 8.0%) after having written off RM263.1 million of impaired financing. Though still weaker than the industry average of 3.3% as at the same date, RAM Ratings acknowledges the gradual improvement in the Bank’s asset quality since the new management team had been installed in late 2008. Its financing delinquency ratio, in particular, had ameliorated from 9.5% as at end-March 2010 to 7.9% as at end-December 2010. Nonetheless, we opine that more time is needed for the seasoning of its new financing portfolio given that the management only commenced the Bank’s new credit-risk-management infrastructure and processes towards the end of 2009.

RAM Ratings perceives the Bank to have a small presence relative to its peers, with about a 1%-share of the market’s outstanding financing and deposits. On this note, the Bank is embarking on its growth strategies as part of its transformation plan to attain a larger market share in the competitive consumer and corporate-banking segments. In 9M FY Mar 2011, Bank Muamalat recorded a stronger pre-tax profit of RM143.7 million (9M FY Mar 2010: RM106.9 million), largely anchored by lower financing-loss provisions. Going forward, RAM Ratings expects the Bank’s credit costs to moderate as a more rigorous credit-risk-management infrastructure has been installed to ensure stricter financing origination while efforts to clean up legacy troubled credits are almost completed.

While the management has been gradually rebalancing the Bank’s securities portfolio with a greater concentration of government securities and higher-rated debt papers, Bank Muamalat is still exposed to some private debt securities (PDS) that may have a negative impact on its future earnings, in the form of future impairment provisions. Its PDS holdings meanwhile had decreased from about 68% of its securities portfolio as at end-March 2010 to 53% as at end-December 2010. RAM Ratings understands that the gradual selling down of the Bank’s PDS portfolio is expected to continue this year and is in line with its plan to only hold such investments for the short- to medium-term.

Notably, Bank Muamalat has enjoyed strong support from its shareholders, as evinced by RM500 million of capital injections from DRB-HICOM Berhad (DRB-HICOM) and Khazanah National Berhad (Khazanah) in March 2009. As a result, the Bank’s Tier-1 and overall risk-weighted capital-adequacy ratios (RWCARs) came up to 14.3% and 18.4%, respectively, as at end-December 2010. The Bank plans to raise up to RM400 million from its Proposed Subordinated Sukuk in FY Mar 2012, to boost its capitalisation; this will lift its pro forma RWCAR to 19.6%, based on its risk-weighted assets as at end-December 2010.

Meanwhile, we note that Bank Muamalat has a high level of depositor-concentration risk; its top 20 depositors accounted for about 45% of its total customer deposits as at end-December 2010. Nevertheless, the Bank’s long-standing relationships with its depositors help to maintain the stability of its deposit base. The Bank is also making efforts to diversify its depositor base to reduce over-reliance on funding from large depositors. On a more positive note, Bank Muamalat maintains a very liquid balance sheet, with a liquid-asset ratio of 61.0% as at the same date - thus mitigating its depositor-concentration risk.

On 22 April 2011, DRB-HICOM announced its acquisition of a 32.2% stake in Pos Malaysia Berhad (Pos Malaysia) from Khazanah which is expected to be completed by end-June 2011. Upon completion of the acquisition, DRB-HICOM will replace Khazanah as the single largest shareholder of Pos Malaysia. RAM Ratings will monitor for any potential impact to Bank Muamalat and re-assess the rating, if necessary.

Full article: http://www.ram.com.my