Published on 12 Dec 2019.
RAM Ratings has reaffirmed the AA1/Stable/P1 ratings of Sabah Development Bank Berhad’s (SDB or the Bank) debt programmes (as listed below). The reaffirmation reflects our expectation that extraordinary support from the Sabah state government (the State) will be forthcoming in times of need. SDB plays an active part in the implementation of socio-economic development projects in Sabah and enjoys a close relationship with the State, which has backed the Bank’s operations with sizeable deposits, business referrals and letters of support for the former’s debt facilities.
Commercial Papers (CP) Programme of up to RM1.5 billion in nominal value (2014/2021) and Medium-Term Notes (MTN) Programme of up to RM1.5 billion in nominal value (2013/2033)#
CP Programme of up to RM1.0 billion in nominal value (2013/2020) and MTN Programme of up to RM1.0 billion in nominal value (2012/2032)*
MTN Programme of up to RM3.0 billion (2011/2036)
RM1.0 billion MTN Programme (2008/2028)
#The aggregate outstanding CP and MTN cannot exceed RM1.5 billion at any time.
*The aggregate outstanding CP and MTN cannot exceed RM1.0 billion at any time.
Subsequent to the new state government taking office in May 2018, SDB’s strategic role as Sabah’s only development financial institution (DFI) has been clearly defined, with a strong and exclusive focus on Sabah’s development. The State has since appointed a new CEO and replaced most of SDB’s board of directors to drive the Bank’s developmental agenda. Under the State’s instruction, the Bank has also ceased commercial lending to corporates in Peninsular Malaysia and this portfolio is expected to reduce significantly in the next few years. Given its strong relationship with the state government, SDB is expected to finance some of the State’s development projects. While that could entail higher credit risk, the Bank highlighted that only projects that are deemed viable and fully covered by collateral are accepted.
In fiscal 2018 and 1H fiscal 2019, SDB’s loan book had weakened significantly. The Bank’s three-months-past-due loans ratio deteriorated to 65.5% as at end-June 2019 (end-December 2017: 28.8%), mainly due to a few sizeable exposures. As at the same date, SDB’s gross impaired loan (GIL) ratio post-Malaysian Financial Reporting Standard (MFRS) 9 adoption was markedly higher at 52.7% (end-December 2017: 9.3%), as its portfolio of restructured and rescheduled loans had not been classified as impaired pre-MFRS 9. Currently in recovery mode, the Bank plans to reduce its GIL ratio to below 30% in the next three years.
Despite the significant jump in GILs post-MFRS 9, additional provisioning on Day 1 of MFRS 9 adoption was manageable at RM144 mil, given SDB’s largely collateralised loan book. In fiscal 2018, RM102 mil of impairment allowances were made, translating into a high credit cost ratio of 1.7%. However, loan loss provisions made so far cover only 19.3% of SDB’s GILs as at end-June 2019 – which we deem very low as a loss absorption buffer. While the Bank’s tier-1 capital ratio of 16.4% as at end-June 2019 partially mitigates provisioning risks, its loss absorption buffers may come under pressure in a stressed scenario. That said, we believe that the State will readily extend financial support to SDB if required.
SDB’s pre-tax profit dropped 41% to RM110.9 mil in fiscal 2018 (fiscal 2017: RM187.9 mil) owing to higher impairment charges of RM102.0 mil (fiscal 2017: RM22.6 mil) following the adoption of MFRS 9. As a result, its return on risk-weighted assets weakened to 1.7% (fiscal 2017: 3.0%). Separately, the Bank remains largely dependent on wholesale borrowings to fund its operations due to its limited deposit-taking ability. However, the Bank has intentionally raised the proportion of longer-term borrowings since 2018 (up from 50% as at end-December 2017 to 81% as at end-August 2019) to reduce refinancing risk.
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Ratings on Sabah Development Bank Berhad