Published on 13 Oct 2020.
RAM Ratings has reaffirmed Bank of China (Malaysia) Berhad’s (BOCM or the Bank) AA1/Stable/P1 financial institution ratings. The reaffirmation incorporates our expectation of ready financial support from BOCM’s intermediate parent, Bank of China (Hong Kong) Limited, as well as its ultimate parent, Bank of China Limited. The ratings also take into account BOCM’s strong capitalisation, which serves as an ample loss absorption buffer against potentially higher impairment charges in testing economic times caused by the Covid-19 pandemic. As at end-June 2020, common equity tier-1 and total capital ratios stood at 15.3% and 29.6%, respectively.
BOCM is a niche player relative to larger banks in Malaysia. Predominantly a wholesale bank, it also helps to facilitate trade and foreign investments between China and Malaysia, apart from its RMB clearing business. In fiscal 2019, the Bank’s loan portfolio expanded by 13% and growth is expected to remain healthy in fiscal 2020, regardless of the economic setbacks caused by Covid-19 pandemic (1H fiscal 2020 YTD growth: 17%).
As BOCM’s customers are chiefly large corporations, the Bank faces both depositor and borrower concentration. The latter makes the Bank prone to lumpy impairments, as a result of which its gross impaired loans (GIL) ratio had climbed to 2.4% as at end-June 2020 (end-December 2018: 1.0%). Given that 20% of the Bank’s total loans were placed under moratorium, a decline in asset quality had been temporarily averted since the imposition of the Movement Control Order.
Consistent with the targeted repayment assistance programme announced by BNM, which took effect after the moratorium ended on 30 September 2020, BOCM will continue to provide all necessary support to its borrowers who face temporary financial difficulties. As such, asset quality is expected to stay stable in the near term. However, GIL ratio could be nudged higher by several impairments in the event of a prolonged economic downturn. Meanwhile, credit cost is likely to be manageable in view of the extended repayment support initiatives. As at end-June 2020, adjusted GIL coverage (including regulatory reserves) came in at 110.4%.
Although BOCM recorded a higher pre-tax profit of RM77.4 mil in 1H fiscal 2020 (1H fiscal 2019: RM45.1 mil), its earnings might be hit by economic headwinds from the pandemic in the near to medium term. While the Bank will likely encounter pressure on asset quality and earnings in the near term, the impact on its credit metrics is expected to remain within manageable levels. The Bank’s average liquidity coverage and net stable funding ratios were above the 100% threshold in 1H fiscal 2020.
Goh Kwan Kheen, Timothy
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Ratings on Bank of China (Malaysia) Berhad