FW: RAM Ratings reaffirms OCBC Malaysia’s AAA rating

Published on 28 Aug 2018.

RAM Ratings has reaffirmed OCBC Bank (Malaysia) Berhad's (OCBC Malaysia or the Bank) AAA/Stable/P1 financial institution ratings (FIRs) and the AA2/Stable rating of its RM400 million Innovative Tier-1 Capital Securities (2009/2039). The two-notch difference between the issue rating and the Bank's long-term FIR is indicative of the instrument's deeply subordinated nature and embedded interest deferral feature.

The ratings reflect OCBC Malaysia's healthy credit metrics and good franchise among mid-sized corporates and SMEs as well as in property mortgages. The ratings also incorporate our expectation that the Bank will remain highly strategic to its parent, Oversea-Chinese Banking Corporation Limited (the Group), and that the Group will provide ready support if needed. 

OCBC's loan book was relatively unchanged (-0.1%) in 2017 as the Bank has been more selective on new residential mortgages – its largest portfolio (42% of total loans as at end-March 2018). In 1Q 2018, lumpy repayments from corporate borrowers and a continued contraction in residential mortgages led to a further decline in total loans.

With a gross impaired loan (GIL) ratio of 2.2% as at end-March 2018 (end-December 2017: 2.1%; end-December 2016: 2.2%), OCBC Malaysia's asset quality stayed sound. The GIL uptick in 1Q 2018 was attributable to the real estate sector and residential mortgages. Although further slippage cannot be ruled out amid uncertainties among businesses, we expect any impact to be manageable. The Bank's credit-cost ratio fell to a respective 14 bps and 4 bps (annualised) in 2017 and 1Q 2018 (2016: 30 bps) amid write-backs of collective provisions. Its GIL coverage ratio (inclusive of regulatory reserves) of 96% as at end-March 2018 is deemed sound. Only 15% of GILs were clean loans as at end-December 2017.

OCBC Malaysia's pre-tax profit climbed 19% to RM1.3 billion in fiscal 2017, translating into a healthy return on risk-weighted assets (RORWA) of 2.8% (fiscal 2016: RM1.1 billion and 2.2%). The improvement was mainly driven by a decline in impairment charges (due to write-backs of collective provisions) and better fee income. The Bank maintained its RORWA at an annualised 2.8% in 1Q fiscal 2018. 

Given the contraction of its loan book and an expansion of its deposit base, OCBC Malaysia's loans-to-funds ratio had improved to 85% as at end-March 2018 (end-December 2016: 91%). Its liquidity coverage ratio and net stable funding ratio are sound. The Bank's capitalisation was also stronger, with its common equity tier-1 capital ratio standing at a higher 13.5% as at end-March 2018 (end-December 2016: 11.9%), thanks to a better profit and a reduced dividend payout in fiscal 2017 as well as a smaller loan book. We expect the Bank to preserve its capital strength as loan growth, if any, is likely to be slow.

 

Analytical contact
Lim Yu Cheng, CFA, FRM
(603) 7628 1188
yucheng@ram.com.my

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