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RAM Ratings reaffirms OCBC Malaysia’s AAA rating

Published on 19 Aug 2020.

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RAM Ratings has reaffirmed OCBC Bank (Malaysia) Berhad’s (OCBC Malaysia or the Bank) AAA/Stable/P1 financial institution ratings. The reaffirmation is premised on our view that the Bank’s credit metrics will remain at healthy levels throughout the economic downturn. While there are downside risks to asset quality and profitability, the Bank’s comfortable loan loss coverage ratio and strong capital position will provide sufficient buffers against escalating headwinds. The ratings also incorporate our expectation that the Bank will stay highly strategic to its parent, Oversea-Chinese Banking Corporation Limited (the Group). Accordingly, parental support is envisaged to be forthcoming if required. 

On the back of higher impaired loan formation and reduced write-offs, OCBC Malaysia’s gross impaired loan (GIL) ratio had ascended to 2.0% as at end-March 2020 (end-December 2018: 1.9%), albeit remaining sound. While the ratio is higher than the banking system’s 1.6%, we take cognisance of the Bank’s stricter impaired loan reclassification policy. The uptick in GILs during the 15-month period until end-March 2020 was largely attributable to several lumpy corporate exposures. Further delinquencies may arise amid the challenging macroeconomic landscape. 

Asset quality pressure is likely to be more prominent after the central bank-initiated six-month loan repayment moratorium ends in September 2020 and the extension of moratorium for targeted segments on an opt-in basis. That said, the Bank is well-placed to withstand looming challenges, given sturdy GIL coverage and common equity tier-1 capital ratios of 119% and 14.2%, respectively, as at end-March 2020. Its credit cost ratio jumped to an annualised 102 bps in 1Q fiscal 2020 (fiscal 2019: 31 bps; fiscal 2018: 33 bps) due to a build-up of provisions for non-credit-impaired exposures. 

OCBC Malaysia’s pre-tax profit climbed 12% y-o-y to RM1.2 bil in fiscal 2019 (fiscal 2018: RM1.1 bil), driven by stronger fee income and a larger trading gain. This translated into a healthier return on risk-weighted assets of 2.4% (fiscal 2018: 2.3%). Despite a 25-bp OPR cut in 2019, the Bank’s net interest margin held steady at 2.0% in fiscal 2019, thanks to a lower funding cost. The declining interest rate environment and potentially heftier impairment charges are likely to weigh on profitability in the near term.    

OCBC Malaysia’s commendable deposit-funding capabilities are seen in its large base of current and savings account (CASA) deposits, which had expanded steadily in recent years. At 41% of customer deposits as at end-March 2020 (industry average: 28%), the proportion of the Bank’s CASA deposits compares favourably against peers. The Bank’s liquidity coverage ratio and net stable funding ratio were comfortably above the regulatory requirements. 

 

Analytical contact
Tan Shu Xuan
(603) 3385 2497
shuxuan@ram.com.my

Media contact
Padthma Subbiah
(603) 3385 2577
padthma@ram.com.my

 

The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.

RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.

Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.

Published by RAM Rating Services Berhad
© Copyright 2020 by RAM Rating Services Berhad



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