Published on 25 Sep 2020.
RAM Ratings has assigned an AA2 rating to RHB Bank Berhad’s (the Group) proposed RM10 bil Multi-Currency Islamic Medium-Term Note Programme. The rating reflects the facility’s ranking as a senior unsecured obligation of the Group. We have also reaffirmed the entity and debt ratings of RHB Bank and its subsidiaries under our coverage (listed in Table 1), while maintaining the stable outlook on the ratings.
The rating actions reflect our expectation that RHB Bank’s strong loss absorption buffer will sufficiently meet potentially greater provisioning needs arising from the economic crisis at hand. While uncertainties surrounding banks’ asset quality will remain for most of 2020, the Group’s ongoing efforts to ascertain borrowers’ debt servicing abilities after the loan moratorium and to offer targeted relief could stem some delinquencies towards year-end. Should conditions take a turn for the worse, RHB Bank would not be spared possibly large impairments – as would be the case for banks in general. The Group’s robust capitalisation provides comfort to this end, its common equity tier-1 capital ratio remaining among the strongest in the industry (end-June 2020: 16.6%).
RHB Bank’s headline gross impaired loan ratio had eased to 1.9% as at end-June 2020 (end-December 2019: 2.0%) as a result of a reclassification of some impaired exposures as performing and the temporary freeze on changes in delinquency status given the moratorium. Despite a slight improvement in the indicator, the Group had pre-emptively incurred higher loan impairment charges in the first two quarters of 2020, which raised its annualised credit cost ratio to 40 bps in 1H fiscal 2020 (RHB Bank’s guidance for 2020: 30-40 bps). This was observed of most Malaysian banks in view of the heightened credit risk environment.
As credit impairments are likely to rise and the Group’s net interest margin is expected to be compressed further in the coming months, RHB Bank’s earnings will inevitably take a beating this year. Pre-tax profit in 1H fiscal 2020 dipped 24% y-o-y to RM1.3 bil (1H fiscal 2019: RM1.7 bil) owing to a sizeable modification loss from hire purchase and personal financing (RM392 mil) as well as heftier provisions following adjustments to forward-looking macroeconomic variables and a management overlay (RM250 mil cumulatively). These effects were partly offset by stronger investment and trading income, brokerage fee income and insurance surpluses. A better showing in RHB Bank’s investment and trading activities for the rest of the year could mitigate the many downsides to its earnings, although this would largely depend on market conditions.
The financial institution ratings of the Group’s core subsidiaries, RHB Islamic Bank Berhad and RHB Investment Bank Berhad, are equated to those of RHB Bank, considering their strategic importance to the latter. Growth at RHB Islamic has gained significant traction in recent years, propelling its ascension to third position in the Islamic banking space in terms of gross financing. The proportion of Islamic financing had risen to 39.6% of the Group’s domestic loans as at end-June 2020 (end-December 2016: 25%), a tad shy of its target of reaching 40% by the end of 2020. RHB Islamic believes that this target remains achievable.
RHB Investment is a prominent name in the local investment banking scene, consistently ranking among the top five in the league tables for its share of domestic debt and equity market transactions. It is also among the top three stockbrokers locally, having executed 10.8% of the industry’s trades in 1H 2020 in terms of trading volume.
RHB Bank Berhad
RHB Islamic Bank Berhad
RHB Investment Bank Berhad
Loh Kit Yoong
(603) 3385 2493
(603) 3385 2577
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