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RAM Ratings assigns AA2 rating to RHB Bank’s proposed RM10 bil Multi-Currency Islamic MTN Programme

Published on 25 Sep 2020.

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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.

Table 1: Ratings of entities under RHB Banking Group

 

Ratings

RHB Bank Berhad

  1. Financial Institution Ratings

 

AA2/Stable/P1/-

  1. Proposed RM10 billion Multi-Currency Islamic Medium-Term Note Programme

AA2/Stable/-/-

  1. RM5 billion Multi-Currency Medium-Term Note Programme (2015/2045)
  • Senior Notes
  • Subordinated Notes

 

AA2/Stable/-/-

AA3/Stable/-/-

  1. RM3 billion Multi-Currency Medium-Term Note Programme (2011/2031)
  • Senior Notes
  • Subordinated Notes

 

AA2/Stable/-/-

AA3/Stable/-/-

RHB Islamic Bank Berhad

  1. Financial Institution Ratings

 

AA2/Stable/P1/-

  1. RM5 billion Subordinated Sukuk Murabahah Programme (2014/2034)

AA3/Stable/-/-

RHB Investment Bank Berhad

  1. Financial Institution Ratings

 

AA2/Stable/P1/-

  1. RM1 billion Multi-Currency Medium-Term Note Programme (2015/2045)
  • Senior Notes
  • Subordinated Notes

 

AA2/Stable/-/-

AA3/Stable/-/-

 

 

Analytical contact
Loh Kit Yoong
(603) 3385 2493
kityoong@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



Rating Rationale: RHB Bank Berhad

Rating Rationale: RHB Islamic Bank Berhad

Rating Rationale: RHB Investment Bank Berhad

Ratings on RHB Bank Berhad

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