MARC has affirmed its AAA/MARC-1 financial institution (FI) ratings on Maybank Islamic Berhad (Maybank Islamic) and AA+IS rating on Maybank Islamic’s RM1.0 billion Islamic Subordinated Sukuk (Subordinated Sukuk) which qualifies as Tier-2 capital. The outlook on all the ratings is stable.

The Subordinated Sukuk is rated one notch lower than the bank’s FI rating, in line with MARC’s notching policy on subordinated debt. The FI ratings of Maybank Islamic are equalised to its parent, Malayan Banking Berhad (Maybank) (AAA/MARC-1/stable) based on the latter’s importance as the Islamic arm of and profit contributor to Maybank group. In addition, operational integration and shared branding between the parent and its subsidiary further support MARC’s assessment. The rating agency continues to view the likelihood of full and timely financial support from Maybank to Maybank Islamic to be high.

Maybank Islamic has a lead position domestically in terms of asset size, underpinned by healthy capitalisation. As at end-March 2015 (1Q2015), Maybank Islamic has an asset base of RM158.6 billion, with the largest domestic market share in gross financing of 33.0% and total customer deposits of 24.4%. MARC believes that the Islamic bank’s strong market position stems from its ability to leverage on Maybank’s well-established brand name, infrastructure and extensive distribution network. The gross financing and advances portfolio grew sharply by 30.0% year-on-year (y-o-y) to RM116.8 billion as at end-March 2015 (industry average: 21.0%). Nonetheless, the rapid pace of financing growth in recent years may have led to an increase in asset quality weakness. For 1Q2015, the bank’s new impairments rose by 84.6% y-o-y to RM289.1 million although the gross impaired financing ratio remained muted at 0.68% (end-2013: 0.60%). This was partly due to a strong financing base expansion and higher amounts written-off, reclassified as non-impaired and recovered, totalling RM172.9 million (end-1Q2014: RM129.1 million).

MARC views that asset quality is likely to weaken further over the near term given the prevailing economic environment, although Maybank Islamic has a strong buffer to withstand a moderate decline in asset quality and any corresponding increase in impairment charges. The bank’s pre-tax pre-provision profit of RM1.64 billion provided a large cushion relative to impairment charges of RM82.6 million in 2014. The pre-tax pre-provision profit constituted 2.4x of total outstanding impairments of RM675 million while financing loss coverage ratio was at 120.1% during the same period.

The Islamic bank’s pre-tax pre-provision profit grew 27.3% y-o-y to RM424.4 million in 1Q2015 which is largely attributed to financing expansion. However, net financing margins narrowed further to 1.80% from 1.92% in the previous corresponding period, reflecting the intense competitive pressures within the domestic Islamic banking industry. The bank’s net profit grew slightly to RM263.1 million in 1Q2015 on high impairment charges (1Q2014: RM231.9 million). Cost levels, however, have remained low with the cost-to-income ratio of 38.2% at end-1Q2015 being among the lowest of its peers.

While deposits growth continued to lag behind financing growth, resulting in a gross financing-to-deposits ratio of 111.6% as at end-March 2015 (end-2013: 104.7%), liquidity concerns are mitigated by Maybank Islamic’s funding access from its parent Maybank. This is done through the restricted profit-sharing investment account (RPSIA), which increased to RM12.72 billion as at end-1Q2015 (end-2013: RM8.34 billion). On taking the RPSIA into account, Maybank Islamic’s gross financing-to-deposits ratio improves to 99.5%. MARC also notes that its current liquidity coverage ratio (LCR) exceeds the regulatory requirement of a minimum of 60% for 2015.

In respect of capitalisation, Maybank Islamic’s capital levels remain sound despite being lower than the industry average: Common Equity Tier 1, Tier 1 and total capital adequacy ratios (CAR) stood at 11.06%, 11.06% and 14.65% respectively as at end-March 2015 (industry average: 12.30; 12.30%; 15.50%). The capital base was supported by dividend reinvestments and an issuance of Islamic Subordinated Sukuk amounting to RM1.50 billion during 2014. However, capital ratio levels have remained unchanged since 2013 levels due to higher risk-weighted assets following strong financing growth. Notwithstanding that, the bank’s healthy internal capital generation of 14.2% and the flexibility to undertake dividend reinvestment exercises, should the need arise, are expected to remain supportive of the bank’s rapid financing growth. MARC also observes that the bank maintains good capital quality with core capital composing more than 70% of the bank’s total capital base.

The stable outlook on Maybank Islamic reflects MARC’s expectations that the bank will remain a core entity of the Maybank group and maintain a strong market position in the domestic Islamic banking industry.

Contacts:

Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my;

Neoh Jiun Yan, +603-2082 2263/ jiunyan@marc.com.my.