Published on 19 Jun 2020.
RAM Ratings has reaffirmed MBSB Bank Berhad’s (the Bank) A2/Stable/P1 financial institution ratings (FIRs) as well as the ratings of its sukuk programme (Table 1). Concurrently, the corporate credit ratings (CCRs) of its holding company, Malaysia Building Society Berhad (MBSB or the Group), have also been reaffirmed at A2/Stable/P1. Notwithstanding MBSB’s structural subordination as a non-operating holding company, the Group’s ratings are equated to that of its banking subsidiary, MBSB Bank, reflecting its debt-free status at the holding company level. Both the FIRs and CCRs incorporate our expectation of a moderate likelihood of support from the Group’s ultimate shareholder, the Employees Provident Fund.
The reaffirmations of the ratings are underpinned by MBSB’s sturdy loan loss coverage ratio and healthy pre-provision profit, which are anticipated to sufficiently cushion the potential increases in impairment charges amid the highly challenging operating environment. That said, stresses on asset quality will be largely mitigated by its large proportion of personal financing facilities extended to civil servants, which are repaid via direct salary deductions. The Group is also well-capitalised to withstand the growing headwinds ahead.
At present, all of the Group’s Islamic financing resides at MBSB Bank, while its conventional loans are still retained at the holding company level (RM1.9 bil as at end-December 2019, 5% of the Group’s gross financing). The conventional loans are on track for disposal or conversion into Islamic financing by 2021, after which the Group expects to collapse its holding company structure.
As at end-December 2019, MBSB’s gross impaired financing (GIF) ratio stood at 5.2% (end-December 2018: 5.5%). As more than half of MBSB’s impaired financing resides at the holding company level, MBSB Bank’s GIF ratio was a much healthier 2.4% as at the same date. The credit cost ratios of MBSB and MBSB Bank had benefited from a refinement in their provisioning model, coming in at 0.2% and 0.5%, respectively, in fiscal 2019.
While the automatic six-month moratorium on all individual and SME financing repayments will be a temporary reprieve for borrowers, we foresee a subsequent uptick in delinquencies, particularly in MBSB’s non-personal financing portfolios. That said, the Group’s largest credit exposure – personal financing facilities at 59% of gross financing – is expected to continue supporting its asset quality given the direct salary deduction feature of its mostly civil servant customer base. The Group’s and MBSB Bank’s GIF coverage ratios stood strong at a respective 102.6% and 145.2% (including regulatory reserves) as at end-December 2019.
In line with a declining proportion of higher-yielding personal financing in recent years, the Group’s net financing margin has been narrowing, albeit still at a healthy 2.9% in fiscal 2019 (fiscal 2018: 3.1%). As MBSB continues to rebalance its financing mix towards a greater proportion of non-retail financing, margin compression is expected to persist. Accordingly, we anticipate more pressure on profitability owing to narrowing margins and heavier impairment charges, in addition to headwinds to revenue going forward. The Group’s return on risk-weighted assets came in at 2.2% in fiscal 2019.
Despite recent access to current account deposits, MBSB will require time to materially build up and diversify its depositor base. Current account and savings account deposits constituted a mere 2% of total deposits as at end-December 2019, although retail deposits had improved significantly to 21% of customer deposits (end-December 2018: 12%) given the Bank’s primary emphasis on building up retail and SME deposits to comply with the net stable funding ratio requirement. MBSB Bank’s liquidity coverage ratio (LCR) averaged a robust 248% in fiscal 2019. The impact of the deferment of financing payments on liquidity is envisaged to be manageable, supported by Bank Negara Malaysia’s forbearance measures in support of liquidity, including allowing banks to operate below the minimum LCR of 100%.
MBSB’s capitalisation is deemed solid and is expected to stay healthy throughout the economic downturn from the Covid-19 pandemic. Its common equity tier-1 capital ratio stood at 18.8% as at end-December 2019 (end-December 2018: 17.7%).
RM10.0 bil Wakalah Bi Al-Istithmar Sukuk Programme (2019/-)
* combined limit of RM10.0 bil
Tan Shu Xuan
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(603) 3385 2577
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Rating Rationale: MBSB Bank Berhad
Rating Rationale: Malaysia Building Society Berhad
Ratings on MBSB Bank Berhad