Published on 07 Jan 2020.
RAM Ratings has reaffirmed Sumitomo Mitsui Banking Corporation Malaysia Berhad’s (SMBC Malaysia or the Bank) AA1/Stable/P1 financial institution ratings. The ratings consider our expectation of ready support from the Bank’s ultimate parent, Sumitomo Mitsui Financial Group, Inc. (SMFG or the Group), if required, owing to its strategic role in advancing the Group’s Asia-centric growth agenda. Over the years, SMFG has demonstrated firm support for SMBC Malaysia, evinced by capital injections (three totalling about RM2.1 bil via Sumitomo Mitsui Banking Corporation) as well as interbank deposits and cash collateral placements. SMFG is one of the world’s largest financial institutions and among Japan’s three mega banking groups.
Despite charting fairly rapid growth over the years, SMBC Malaysia remains a relatively small wholesale bank, contributing less than 1% of the industry’s loans. Thus, the Bank utilises cash collateral placed by SMFG to provide large loans exceeding its own single-counterparty exposure limit. The Bank’s loan book expanded by 13% y-o-y in FY Mar 2019 and 17% (annualised) in 1H FY Mar 2020. Given its modest size and propensity to finance large corporates, the Bank’s loan book is highly concentrated in terms of borrower and sector.
The credit quality of the Bank’s loan portfolio is favourable, with a negligibly low gross impaired loan (GIL) ratio of 0.04% as at end-September 2019. Subsequent to a net writeback in FY Mar 2019 due to a decline in its closely monitored loans, the Bank’s credit cost ratio normalised to an annualised 20 bps in 1H FY Mar 2020. Nonetheless, SMBC Malaysia’s concentrated portfolio renders it vulnerable to large impairments in the event of credit stress.
In view of a generally top-tier corporate client base, the Bank’s net interest margin stayed thin at an annualised 1.3% in 1H FY Mar 2020. Pre-tax profit, however, climbed 29% y-o-y to RM145.3 mil in the same period as a result of higher trading income. This healthy earnings momentum continued to prop up SMBC Malaysia’s strong capitalisation – the Bank’s common equity tier-1 capital ratio was a robust 22.4% as at end-September 2019. Its capital level is still accommodative of future expansion and will sufficiently cushion potential credit deterioration, if any.
Liang Huey Jean, CFA
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Ratings on Sumitomo Mitsui Banking Corporation Malaysia Berhad