Published on 30 Apr 2021.
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 and provisioning coverage, which afford an ample loss absorption buffer against potential weakening in asset quality when financing relief measures are gradually phased out. 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 the 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 1.1% as at end-December 2020 (end-December 2019: 1.3%), supported by targeted relief assistance (TRA) that the Bank has provided to customers affected by the pandemic as well as its enlarged financing base on the back of a strong 14% growth (banking system: 3%; end-December 2019: +5% y-o-y). As at end-March 2021, around 14% of the Bank’s financing was under TRA or being rescheduled and restructured. When forbearance measures are lifted, the Bank’s asset quality indicators are likely to weaken.
Although the bulk of Bank Muamalat’s sizeable personal financing (24% of financing base) comes with salary transfer arrangements, we are watchful of the rapid 29% growth of this portfolio last year. As the Bank has become more selective in lending to its traditional army personnel segment, most of the increase in personal financing in 2020 stemmed from new customer segments such as professionals, government servants, government-related company employees and multinational company employees. The asset quality of these newly disbursed personal financing remains to be seen, given the lack of seasoning. On a brighter note, the Bank had pre-emptively built up provision reserves, which led to a stronger GIF coverage ratio (including regulatory reserves) of 122% as at end-December 2020 (end-December 2019: 103%). Respective common equity tier-1 and total capital ratios of 15.5% and 18.0% as at the same date further fortify its defence against a potential rise in credit losses.
Deposits grew by a robust 14% in 2020 (banking system: 4%; end-December 2019: -3% y-o-y), keeping pace with financing growth. Consequently, its net financing to deposit ratio stayed comfortably below 85%, as it has over the last few years. That said, Bank Muamalat is still heavily dependent on wholesale deposits while the proportion of retail deposits amounted to only 11% (industry: 39%) — a reflection of its weaker retail deposit franchise. Depositor concentration risk also remains, with the top 10 non-bank deposits comprising 34% of total deposits as at end-December 2020.
The successive overnight policy rate cuts and net modification losses compressed Bank Muamalat’s net financing margin to 2.3% in FY Dec 2020 (annualised 9M FY Dec 2019: 2.5%), although it is still deemed healthy relative to peers. This, coupled with heftier impairment charges, saw its pre-tax profit declining 24% y-o-y to RM175 million from RM229 million (12-month period ending 31 December 2019). The Bank’s still high cost-to-income ratio, albeit lower than the previous year’s, and small proportion of non-financing income continue to constrain its profitability. As with other banks, we expect Bank Muamalat’s earnings to remain pressured in the still challenging operating environment.
Hafiz Abdul Aziz
(603) 3385 2534
(603) 3385 2577
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Ratings on Bank Muamalat Malaysia Berhad