Published on 09 Jul 2020.
RAM Ratings has reaffirmed HSBC Bank Malaysia Berhad’s (the Bank) AAA/Stable/P1 financial institution ratings and the AA1/Stable rating of its RM500 million Tier-2 Subordinated Bonds (2007/2027). The reaffirmation is premised on our view that the Bank will be able to maintain its credit metrics throughout the economic downturn. Despite the heightened downside risk to asset quality, the Bank’s comfortable loan loss coverage ratio and healthy pre-provision profit are anticipated to provide sufficient buffers against additional provisions without affecting its strong capital position. Given the Bank’s strategic importance to HSBC Holdings plc (the Group), the ratings also incorporate our expectation of ready parental support in times of need.
As part of a leading global bank, HSBC Malaysia benefits from the Group’s global connectivity and technical expertise, which give it a competitive advantage in serving clients with cross-border banking needs and large corporates, despite its mid-sized stature by assets. Notably, the Bank’s strong cash management capabilities are reflected in its high proportion of current and savings account deposits, which stood at 56% of customer deposits as at end-March 2020. Further, HSBC Malaysia has consistently clocked in liquidity coverage and net stable funding ratios that are well above the respective regulatory minimums of 100%.
HSBC Malaysia’s gross impaired loans (GIL) ratio inched up to 1.9% as at end-March 2020 (end-December 2018: 1.8%), mainly due to an increase in restructured and rescheduled personal loans and, to a lesser extent, the default of two business accounts. Accounting for differences between the Bank’s more stringent impaired loan classification policies and industry practice, its adjusted GIL ratio of 1.4% fared better than the industry’s 1.6%. Although delinquencies are likely to creep up after the six-month loan repayment moratorium ends, we expect the Bank’s comfortable GIL coverage of 100% (including regulatory reserves) and strong common equity tier-1 capital ratio of 15.1% to provide ample headroom against growing headwinds. Comfort can also be derived from the Bank’s tighter underwriting and risk management in recent years. The Bank’s credit cost jumped to an annualised 98 bps in 1Q fiscal 2020 (fiscal 2019: 26 bps; fiscal 2018:16 bps) due to a pre-emptive build-up of provisions for non-credit-impaired exposure as the economic outlook deteriorates.
HSBC Malaysia’s pre-tax profit declined 15% y-o-y to RM1.3 bil in fiscal 2019 (fiscal 2018: RM1.5 bil) on account of higher operating expenses and heftier impairment charges, which more than offset stronger trading income. In tandem, its return on risk-weighted assets was lower, but still respectable at 2.2% (fiscal 2018: 2.7%). In addition, the Bank’s net interest margin remained loftier than peers’ at 2.6%, thanks to its superior access to low-cost deposits. Despite heavier pressure on profitability amid the tougher economic climate, pre-provision profit is expected to sufficiently cushion against further provisioning needs.
Tan Shu Xuan
(603) 3385 2497
(603) 3385 2577
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Ratings on HSBC Bank Malaysia Berhad