Published on 06 Aug 2020.
RAM Ratings has reaffirmed Bank Muamalat Malaysia Berhad’s (the Bank) financial institution ratings (FIRs) at A2/Stable/P1. The ratings consider the Bank’s sturdy capitalisation, which provides a strong loss absorption buffer against an anticipated rise in defaults in the wake of the Covid-19 pandemic, notwithstanding the extension of financial relief to affected borrowers. We have also reaffirmed the A3/Stable rating of the Bank’s RM1 billion Subordinated Sukuk Murabahah Programme (2016/2036). The one-notch difference between Bank Muamalat’s long-term FIR and the rating of the subordinated sukuk programme reflects the subordination of the facility to the Bank’s senior unsecured obligations.
Bank Muamalat’s gross impaired financing (GIF) ratio improved to 1.4% as at end-March 2020 (end-December 2018: 2.2%) as a result of larger write-offs – primarily in personal financing – and the enhancement of the Bank’s collection strategies. After the six-month financing moratorium in response to the pandemic ends, the credit quality of Bank Muamalat’s financing book – particularly its residential property financing portfolio – will likely see deterioration. The 2.5% GIF ratio of this segment is already more than double the industry average of 1.2% at present. On balance, the asset quality of the Bank’s sizeable personal financing portfolio is envisaged to remain resilient supported by direct salary deductions from borrowers.
GIF coverage (including regulatory reserves) stayed adequate at 103% as at end-March 2020 (industry: 125% as at end-February 2020). The dimmer asset quality outlook is also mitigated by the Bank’s strong capital buffer, with common equity tier-1 and total capital ratios at a respective 15.4% and 18.0% as at end-March 2020 (end-March 2019: 15.8% and 18.6%).
Ranked among the smallest banks domestically, Bank Muamalat accounts for around 1% of the banking system’s outstanding financing and deposits. The Bank is still highly dependent on wholesale deposits, with retail deposits amounting to only 11% of total deposits (industry: 38%) – a reflection of its weaker retail deposit franchise. While having reduced, depositor concentration risk remains, with the top five non-bank deposits comprising 24% of total deposits as at end-December 2019 (end-December 2018: 35%).
Despite healthy net financing margins of 2.3% to 2.5%, Bank Muamalat’s persistently high cost to income ratio and relatively small proportion of non-financing income suppress its profitability. The Bank’s pre-tax profit fell 8% to RM140.3 mil for 9M FY Dec 2019 owing to higher impairment charges. This translated into a return on risk weighted asset of 1.3%, among the lowest in the industry. In 1Q FY Dec 2020, pre-tax profit tumbled to RM4.2 mil due to a pre-emptive build-up of provisioning buffers. This was exacerbated by an unrealised loss on revaluation of financial investments, caused by a sharp increase in bond yields in March 2020. We anticipate a downward bias in profitability, underscored by our expectation of continued margin compression and heftier provisions.
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Ratings on Bank Muamalat Malaysia Berhad