Published on 26 Jul 2019.
RAM Ratings has reaffirmed OCBC Bank (Malaysia) Berhad’s (OCBC Malaysia or the Bank) AAA/Stable/P1 financial institution ratings. The ratings reflect the Bank’s established franchise, healthy capitalisation, sound funding and liquidity and satisfactory asset quality. In addition, we expect the Bank to remain highly strategic to its parent, Oversea-Chinese Banking Corporation Limited (the Group), the second-largest banking group in Southeast Asia (by assets), with strong credit metrics.
Leveraging on the Group’s regional network and expertise, OCBC Malaysia has an established franchise among corporates and is able to serve its clients’ cross-border banking needs despite its mid-sized stature by assets. The Bank was the top arranger in the Malaysian syndicated loans market for 2017 and 2018. Expansion of corporate loans in 2018, which more than offset contraction in residential mortgages, led OCBC Malaysia’s loan growth to recover slightly to 1.5% for the year (2017: -0.1%).
OCBC Malaysia’s gross impaired loan (GIL) ratio had declined to 1.9% as at end-March 2019 (end-December 2017: 2.1%) amid the partial write-off of some corporate accounts in 2018 and benign impaired loan formation. Nonetheless, the Bank could see slippage from its exposure to the construction sector (4.4% of total loans as at end-March 2019) as a few contractors face delays in receiving payments. An internal downgrade of some construction loans, coupled with a group-wide decision to write down offshore support vessel (OSV) collateral to scrap value and worsening macroeconomic variables, pushed up the Bank’s credit cost ratio to an annualised 66 bps in 1Q fiscal 2019 (full-year fiscal 2018: 33 bps), or an annualised 49 bps excluding the OSV provision. On balance, the Bank’s GIL coverage ratio (inclusive of its regulatory reserve) was a sturdy 118%.
Amid heftier impairment charges, OCBC Malaysia’s pre-tax profit fell 14% from a record high of RM1.3 bil in fiscal 2017 to RM1.1 bil in fiscal 2018 and slid another 31% y-o-y to RM0.2 bil in 1Q fiscal 2019. The Bank’s pre-tax return on risk-weighted assets dwindled to a respective 2.3% and 1.8% (annualised) for the two fiscal periods (fiscal 2017: 2.8%). While its net interest margin has been widening, thanks to an improved funding cost, the Bank’s full-year performance could stay subdued as potential asset quality slippage could keep impairment charges high.
OCBC Malaysia’s liquidity coverage ratio is comfortably above 100% while its net stable funding ratio already exceeds the 100% requirement that will take effect only in 2020. The Bank’s customer deposit growth since 2018 has been mainly driven by current and savings account (CASA) deposits. As such, the proportion of CASA deposits had steadily risen to 34% of customer deposits as at end-March 2019 (end-December 2017: 30%). The Bank’s common equity tier-1 capital ratio was a healthy 13.1% as at the same date, even without considering unaudited profit for 1Q fiscal 2019, which would contribute 0.3 percentage points.
Lim Yu Cheng, CFA, FRM
(603) 3385 2492
(603) 3385 2577
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Published by RAM Rating Services Berhad
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Ratings on OCBC Bank (Malaysia) Berhad