RAM Ratings reaffirms Sabah Credit Corporation's AA1/P1 issue ratings

Published on 12 July 2011
RAM Ratings has reaffirmed the respective long- and short-term ratings of Sabah Credit Corporation’s (SCC or the Corporation) RM500 million Commercial Papers/Medium-Term Notes (CP/MTN) Programme (2007/2014), at AA1 and P1; the long-term rating has a stable outlook. The ratings reflect the strong commitment and support from the State Government of Sabah (State Government, rated AAA/P1 by RAM Ratings).


Wholly owned by the State Government and operating under the purview of the Sabah State Ministry of Finance, SCC provides financing to employees of both the State and Federal Governments via direct salary deductions. Given its close relationship with the State Government, the Corporation has been allowed the privilege of making direct salary deductions for state employees’ repayments on personal loans via the State Treasury. Support from the State Government is further demonstrated by its board representation as well as the subordination of SCC’s existing and future loans from the State Government (both principal and interest) to the Corporation’s debt securities. SCC has also received approval from the State Government to convert the latter’s loan of up to RM100 million into share capital at the option of the Corporation.

In FY Dec 2010, SCC recorded a 3.2% year-on-year (y-o-y) growth in its personal financing portfolio - its largest lending sector - following a contraction the year before. The financing growth was largely supported by the introduction of its Islamic personal-financing product and the reduction of effective profit rates on personal financing facilities to draw customers. As at end-December 2010, SCC’s gross non-performing-loan ratio had edged up from 8.6% to 9.0% y-o-y, after having abolished its policy of deducting 2 months’ salary in advance for new personal financing since 2009 due to keen competition. Overall, the credit quality of its personal-financing portfolio has remained manageable due to the deployment of a direct-salary-deduction mechanism. Meanwhile, SCC remains exposed to concentration risk, with almost 78% of its loans extended to this segment as at end-December 2010.

The Corporation recorded a respectable profit performance in fiscal 2010, with a pre-tax profit of RM42.3 million that was largely due to lower loan-loss provisions. Given the lower profit rates on its personal financing (contracted at fixed rates) and its higher cost of funds, SCC’s net interest margin narrowed from 5.4% to 5.0% y-o-y. In line with the current uptrend in interest rates, we anticipate its net interest margin to narrow further as almost all of its lending assets comprised fixed-rate facilities as at end-December 2010.

Media contact
Shireen Ng
(603) 7628 1021
shireen@ram.com.my

IMF urges Italy to enforce spending cuts

The International Monetary Fund (IMF) has asked Italy to ensure "decisive implementation" of spending cuts to reduce the country's debt.



Its comments come as concerns continue that Italy may be the next country to be affected by the debt crisis in the eurozone.

SEE BBC ARTICLE IN FULL. CLICK ON THIS LINK.

RAM Ratings reaffirms rating of Prestar's debt facility

Published on 12 July 2011
RAM Ratings has reaffirmed the short-term P2 rating of Prestar Resources Berhad’s (Prestar or the Group) RM120 million Nominal Value Commercial Papers (CP) (2005/2012). Prestar is an investment-holding company with subsidiaries engaged in steel processing, fabrication of steel pipes as well as the manufacture and trading of steel products.

The rating of Prestar’s CP is mainly premised on its established position in Malaysia as a sizable local downstream steel player. Besides having one of the larger local steel-processing centres, Prestar also commands approximately half of the market for the manufacture of guardrails in Malaysia. The rating is further supported by the Group’s diversified spectrum of steel products, which caters to many industries and hence reduces its exposure to any particular segment.

Like most steel players, however, Prestar is exposed to volatile steel prices, resulting in fluctuating margins. We note that this can be particularly evident for Prestar as it tends to increase its purchase of raw materials when prices are on an uptrend, and vice versa, as noted amid the opposing trends in prices during the first and second halves of 2010. “Prestar’s margins broadened in 1H FY Dec 2010 as the Group had benefited from the uptrend in steel prices. On the other hand, its margins went into negative territory in 2H FY Dec 2010 when steel prices were on a sustained downtrend, made worse by the Group’s enlarged inventory of expensive steel,” observes Kevin Lim, Head of RAM Ratings’ Consumer & Industrial Ratings.

“Despite the challenging conditions, Prestar was able to post a 20.3% y-o-y increase in revenue to RM553.63 million in fiscal 2010 (FY Dec 2009: RM459.88 million), driven by increased sales volumes for some of its main products and overall higher steel prices y-o-y. Nonetheless, the Group’s pre-tax margin had been affected by falling steel prices in the second half,” adds Kevin.

Meanwhile, Prestar’s financial profile remained relatively unchanged in fiscal 2010. Although its borrowings had increased slightly, its gearing ratio stayed stable at a moderate 1.08 times, supported by increased equity through retained earnings.

Similarly, Prestar’s funds from operations (FFO) debt coverage was kept unchanged at 0.11 times as at end-FY Dec 2010. However, the Group’s operating cashflow debt coverage was almost halved to 0.08 times y-o-y, owing to heftier working capital.

Moving forward, RAM Ratings expects Prestar’s gearing level to be maintained at about 1 time over the next 2 years while its FFO debt coverage hovers around 0.1 times, supported by resilient demand for the Group’s core products.

Media contact
Ben Inn
(603) 7628 1024
ben@ram.com.my

Eurozone ministers meeting to discuss debt concerns

Senior European Union officials are meeting later to discuss the eurozone's continuing debt woes.

The talks in Brussels were arranged over the weekend by European Council president Herman Van Rompuy. His spokesman denied that it was a crisis meeting.

SEE BBC ARTICLE ON FULL. CLICK ON THIS LINK

RAM Ratings reaffirms BAT Malaysia's AAA/P1 ratings

Published on 07 July 2011
RAM Ratings has reaffirmed the AAA/P1 ratings of British American Tobacco (Malaysia) Berhad’s (BAT Malaysia or the Group) RM100 million Commercial Papers/Medium-Term Notes Programme (2007/2014). At the same time, the AAA rating of the Group’s RM700 million Medium-Term Notes Programme (2007/2020) has also been reaffirmed. Both the long-term ratings have a stable outlook.

BAT Malaysia’s credit profile is supported by its entrenched market position and superior financial profile. Although its share of domestic sales contracted 0.6 percentage points year-on-year in 2010, the Group remained the clear leader with a 59.7%-share of the market. Its flagship Dunhill remained the most popular local premium brand last year, with a 65.6%-share (2009: 64.8%) of this segment. The Group also garnered a significant 33.5%-share of the value-for-money segment (2009: 33.7%). Despite the challenging landscape of the tobacco industry, BAT Malaysia’s adjusted funds from operations and operating cashflow debt cover ratios stayed superior at above 1 time as at end-December 2010.

Offsetting the above strengths are the increasingly difficult operating environment and regulatory risks of the local tobacco industry. The industry’s sales volumes are still vulnerable to excise-duty hikes and the proliferation of illicit cigarettes.

Industry sales volumes declined for the seventh consecutive year in 2010, following a steep 16% spike in excise duty last October. While the incidence of illicit cigarettes had reduced slightly from its peak of 37.5% in 2009 to 36.3% in 2010, they still accounted for a significant portion of local tobacco consumption. Despite the minimum pricing imposed on cigarettes last year, we understand that certain manufacturers of extremely-low-priced cigarettes have been selling their output below floor prices, in a bid to gain market share. Should this persist, the sales volumes of the 3 major domestic tobacco manufacturers – BAT Malaysia, JT International Berhad and Phillip Morris Sdn Bhd – may be affected.

At the same time, BAT Malaysia’s margins are expected to be squeezed by a full year’s effect from the withdrawal of 14-stick packs (which yield higher margins than 20-stick packs). Nonetheless, the Group’s profitability is viewed to remain commendable relative to its AAA-rated peers. “Looking ahead, we expect BAT Malaysia’s cashflow-protection measures to stay superior, supported by its well-established market position and strong brand equity,” opines Kevin Lim, RAM Ratings’ Head of Consumer & Industrial Ratings.

Media contact
Low Su Lin
(603) 7628 1071
sulin@ram.com.my

Is Business a zero sum game?

This is a very important question that needs to be answered. Is business a zero sum game?



By definition, business is about trade. Since population is a factor of demand, tradesman is a factor of business. Therefore, in business, assuming at the supply-demand equilibrium, the entry of a tradesman into the equation meant a reduction in demand for existing tradesmen to keep the supply-demand point fixed.

The possibility occurs in monopolistic or oligopolistic industries.



So, if you ever decide to go into business in such industry, expect resistance to your entry!

RAM Ratings reaffirms NACF's AAA debt rating

Published on 05 July 2011
RAM Ratings has reaffirmed the AAA rating of National Agricultural Cooperative Federation’s (NACF or the Cooperative) senior notes under its Medium-Term Notes Programme of up to RM3.3 billion (MTN); the long-term rating has a stable outlook.

The rating is anchored by NACF’s strategic importance to the Government of South Korea (GoK) in implementing agricultural policies as well as improving the economic and social status of farmers in South Korea. NACF also acts as a “central bank” to member cooperatives via its mutual credit services. Given the Cooperative’s crucial role, it derives strong financial support from the GoK.

NACF is currently undergoing a reorganisation that involves separating its profit centres into 2 new holding companies, i.e. financial and non-financial.

Post-reorganisation, the MTN will likely be vested over to a newly established subsidiary, NH Bank (currently known as the Cooperative’s credit and banking unit), under the financial holding company; this will remain NACF’s core profit centre. As expressed in its recent letter of support, the GoK will provide the necessary backing, such as capital injections and tax exemptions, to facilitate the reorganisation. The capital-adequacy ratio of NH Bank is also expected to remain strong at about 15%. We are of the view that both NACF and NH Bank will continue benefiting from the GoK’s sturdy support, underpinned by their pivotal roles in the country’s agricultural policies.

As at end-December 2010, NACF’s gross non-performing-loan (NPL) ratio had deteriorated to 2.5% while its credit-cost ratio had increased to 0.9% (end-December 2009: 1.3% and 0.7%), driven by higher NPLs and heftier provisioning for real-estate project financing and corporate loans amid the sluggish property sector. Nonetheless, the Cooperative’s gross NPL ratio eased marginally to 2.3% as at end-March 2011; we expect the ratio to be reduced to below 2% by the end of this year, backed by NPL disposals and write-offs. Meanwhile, NACF’s credit cost is expected to remain elevated in fiscal 2011.

All said, the Cooperative boasts a healthy funding profile, as evinced by its large share of South Korea’s customer deposits – a testament to its extensive branch network. NACF’s capitalisation remained strong as at end-March 2011, with respective tier-1 and overall risk-weighted capital-adequacy ratios of 12.8% and 16.5% (end-December 2010: 12.2% and 16.0%).

Media contact
Gladys Chua
(603) 7628 1049
gladys@ram.com.my

RAM Ratings assigns AAA/P1 ratings to CIMB Islamic Bank; reaffirms ratings of CIMB Group Holdings, CIMB Bank and CIMB Investment Bank

Published on 04 July 2011
RAM Ratings has assigned respective long and short-term financial institution ratings of AAA and P1 to CIMB Islamic Bank Berhad (CIMB Islamic) while reaffirming the AAA and P1 financial institution ratings of CIMB Bank Berhad (CIMB Bank) and CIMB Investment Bank Berhad (CIMB IB). Concurrently, we have also reaffirmed the AA1/P1 corporate credit ratings of CIMB Group Holdings Berhad (CIMBGH or the Group) as well as the AA1/P1 ratings of its RM6 billion Conventional and Islamic Commercial Papers/Medium-Term Notes Programme (2008/2038), along with the AA3 rating of its RM3 billion Subordinated Notes Programme (2009/2074). All the long-term ratings have a stable outlook.

CIMB Bank, CIMB Islamic and CIMB IB collectively form the third-largest universal-banking group by assets in Malaysia, and are viewed to be systemically important. The AAA/Stable/P1 ratings reflect their integrated operations and close relationships, particularly the ability to leverage on distribution channels, treasury operations and risk-management systems, as well as their strong and entrenched franchise and market positions. Meanwhile, CIMBGH’s ratings are supported by the sound credit fundamentals of its subsidiaries and the Group’s expanding regional franchise.

CIMBGH is the fifth-largest banking group in ASEAN in terms of assets; it enjoys a strengthening franchise in the region. In Malaysia, the Group remains among the top players in consumer banking, and is a leader in investment-banking and stockbroking league tables. Meanwhile, the Group’s domestic Islamic banking business, conducted via CIMB Islamic, has made strides in its financing and deposit-expansion strategy – Islamic financing facilities and deposits expanded 18% and 14%, respectively, in 2010.

While the Malaysian entities still contribute most (52%) of the Group’s pre-tax profits, PT CIMB Niaga Tbk (CIMB Niaga) - its Indonesian commercial-banking subsidiary - is a crucial component in CIMBGH’s profit aspirations. In FY Dec 2010, contributions from CIMB Niaga made up 34% of the Group’s consolidated pre-tax profit of RM4.7 billion (FY Dec 2009: 21% and RM3.8 billion). CIMB Niaga is Indonesia’s fifth-largest bank by assets, and CIMBGH’s largest overseas subsidiary. Elsewhere, the Group has a smaller presence in Thailand through CIMB Thai Bank Public Company Ltd (CIMB Thai, a subsidiary of CIMB Bank). Although CIMB Thai’s profitability has improved, it remains a marginal contributor of the Group’s pre-tax gains.

Notably, CIMBGH’s banking entities continue to constitute the lion’s share of its profits; its asset-management and insurance division only accounted for 2% in fiscal 2010. As at end-March 2011, the Group’s gross impaired-loan (GIL) ratio of 5.9% was better than its restated GIL ratio of 7.6% as at end-December 2009. Meanwhile, its credit-cost ratio was kept low at 0.4% in FY Dec 2010, with one-off impairment adjustments made on its retained earnings - a result of having adopted FRS 139 for provisioning purposes.

Including the borrowings of CIMB Group Sdn Bhd (the intermediate holding company), CIMBGH’s adjusted gearing ratio had eased to 0.31 times as at end-December 2010 (end-December 2009: 0.4 times); its double-leverage ratio stood at 1.15 times. The dividends received by CIMBGH from its Malaysian subsidiaries have been sufficient for its debt servicing needs. To sustain capital for business growth, CIMB Niaga did not pay any dividends to its parent in fiscal 2010, and is expected to continue retaining its earnings this year for future growth. CIMB Niaga’s capital management plans also include the issuance of subordinated debt.

Over the medium term, profit contributions from CIMBGH’s foreign operations are expected to surpass those of its Malaysian entities. Although the Group’s geographical expansion strategy has aided its earnings diversification, RAM Ratings is mindful of the risks associated with rapid expansion in emerging markets. On this note, we will keep monitoring CIMBGH’s ability to manage these risks, as well as the extent of financial support required by its emerging-market entities.

CIMB Bank Berhad
CIMB Bank’s AAA/Stable/P1 ratings are supported by its systemic importance as Malaysia’s third-largest commercial bank by assets; it held 11% of the domestic banking industry’s loans and deposits as at end-December 2010. CIMB Bank’s profit performance remained resilient in fiscal 2010, with a 16% jump in pre-tax profit to RM3 billion. Nonetheless, we note some compression in net interest margins, along with relatively high operating costs.

As at end-December 2010, CIMB Bank’s asset quality was moderately healthy, with an improved GIL ratio of 3.9% (end-December 2009: restated GIL of 6.2%). On the whole, its funding and liquidity profiles remained healthy, aided by strong accumulation of deposits. We opine that CIMB Bank’s capitalisation levels are favourable, with respective tier-1 and overall risk-weighted capital-adequacy ratios (RWCARs) of 11.4% and 14.9% as at end-December 2010.

CIMB Islamic Bank Berhad
CIMB Islamic’s AAA/Stable/P1 ratings are anchored by the high degree of integration between its operating model and that of its parent, CIMB Bank. CIMB Islamic leverages on its parent’s back-room operations, risk-management systems, treasury operations and distribution channels, and also benefits from CIMB Bank’s strong franchise and market position. CIMB Islamic is the second-largest Malaysian Islamic commercial bank in terms of assets, with a 14.3%-share of the Islamic banking industry’s assets as at end-2010. Its gross financing portfolio augmented 39% to RM23 billion in FY Dec 2010 - the primary reason for the surge in its pre-tax profit to RM403.8 million the same year.

CIMB Islamic’s asset quality is deemed moderate, although RAM Ratings notes that its financing portfolio remains unseasoned due to its rapid expansion in the last few years. On the back of a larger financing base, CIMB Islamic’s gross impaired-financing ratio only came up to 1.5% as at end-December 2010. On the other hand, its financing-loss provisions over average gross financing ratio remained high at 1.0%, albeit better than the 2.5% of a year earlier. With financing growth ahead of deposit accumulation, CIMB Islamic’s financing-to-deposits ratio had risen to 99% as at end-December 2010. While this ratio is high, funding and liquidity support from CIMB Bank has been observed, with inter-bank deposits from the latter making up almost 25% of CIMB Islamic’s profit-bearing funds. We consider CIMB Islamic’s tier-1 and overall RWCARs to be healthy, at a respective 13.2% and 17.2% as at end-December 2010, following a rights issue and a smaller risk-weighted asset base.

CIMB Investment Bank Berhad
CIMB IB holds AAA/Stable/P1 ratings; it is the investment-banking, advisory and stockbroking arm of the larger Group. Its ratings mirror those of its sister company, CIMB Bank, and reflect the close relationship between these 2 entities. CIMB IB has retained its leadership in Malaysian mergers and acquisitions, advisory services, debt-capital-market as well as equity league tables, and secondary equity-market trades.

Given the robust capital markets last year and the procurement of major deals, CIMB IB’s fee and brokerage income surged to a respective RM260.2 million and RM163.7 million in FY Dec 2010 (FY Dec 2009: RM235.7 million and RM108.6 million).

Nonetheless, this had been partially offset by a hefty RM80 million one-off provision on losses from its investment-management and securities services. As a result, its pre-tax profit diminished 53% year-on-year to RM96.2 million in fiscal 2010 (FY Dec 2009: RM204.7 million). As at end-December 2010, CIMB IB’s overall RWCAR stood at 17.1%. While this is lower than the Malaysian investment-banking industry’s average of 35% as at the same date, capital support from the Group is expected to be forthcoming, if needed.

Media contacts
Joanne Kek
(603) 7628 1163
joanne@ram.com.my

RAM Ratings upgrades ratings of EON Bank’s debt securities, withdraws financial institution ratings

Published on 01 July 2011

RAM Ratings has upgraded the rating of EON Bank Berhad’s (EON Bank or the Group) Innovative Tier-1 Capital Securities Issuance Programme of up to RM1 billion to AA3 from A3. Concurrently, the rating of Subordinated Medium-Term Notes (MTN) Issuance Programme of up to RM2 billion has also been upgraded to AA2 from A2. Both the long-term ratings carry a stable outlook.

The ratings upgrade is premised on the credit standing of the new obligor of EON Bank’s debt securities, i.e. Hong Leong Bank Berhad (Hong Leong Bank), whose financial institution ratings of AA1/Stable/P1 were reaffirmed on 29 April 2011. Pursuant to the vesting order granted by the High Court on 17 June 2011, all the assets and liabilities of EON Bank are to be transferred to Hong Leong Bank on 1 July 2011.

The 1-notch rating differential between Hong Leong Bank’s AA1 long-term financial institution rating and the AA2 rating of its Subordinated MTN Issuance Programme reflects the subordination of the debt facility to the Group’s senior unsecured obligations. Meanwhile, the 2-notch rating differential between Hong Leong Bank’s long-term financial institution rating and the AA3 rating of its Innovative Tier-1 Capital Securities Issuance Programme reflects the deeply subordinated nature of the latter and its embedded interest-deferral feature.

RAM Ratings has withdrawn the A1/P1 financial institution ratings of EON Bank with immediate effect. As such, we no longer have any rating obligations on the Group.

Media contact
Amy Lo
(603) 7628 1078
amy@ram.com.my

RAM Ratings withdraws SPLASH’s debt rating, discontinues rating updates on proposed bonds of Destinasi Teguh and Sungai Harmoni

Published on 30 June 2011

RAM Ratings has withdrawn the rating of Syarikat Pengeluar Air Sungai Selangor Sdn Bhd’s (SPLASH or the Company) RM1,407 million Al-Bai Bithaman Ajil Debt Securities Issuance Facility (BaIDS) (2000/2016), and will no longer maintain rating surveillance on the debt facility. This follows the Company’s request for the withdrawal of its debt rating.

Prior to the rating withdrawal, the BaIDS had carried a BBB3 rating, which had been on negative Rating Watch. The negative Rating Watch had reflected SPLASH’s strained liquidity profile arising from poor collections from its sole counterparty, Syarikat Bekalan Air Selangor Sdn Bhd, amid the protracted restructuring of Selangor’s water industry. RAM Ratings highlights that if the debt facility had remained under surveillance, the rating would have been subjected to further downward pressure.

Meanwhile, the management of both Destinasi Teguh Sdn Bhd and Sungai Harmoni Sdn Bhd has requested that the ratings of their proposed bond issues be kept private. As such, RAM Ratings will no longer provide rating updates on the proposed bond issues of Destinasi Teguh Sdn Bhd and Sungai Harmoni Sdn Bhd.

Media contact
Chew Wei Li
(603) 7628 1025
weili@ram.com.my