Published on 12 Jul 2021.
RAM Ratings has reaffirmed the AAA/Stable/P1 financial institution ratings of HSBC Bank Malaysia Berhad (HSBC Malaysia or the Bank) and HSBC Amanah Malaysia Berhad. The ratings of the entities’ debt facilities have also been reaffirmed (Table 1). The reaffirmations are underpinned by the Bank’s robust capitalisation and superior funding and liquidity profile. The Bank’s underlying asset quality remains sound despite a higher headline ratio due to conservative classification. In view of the Bank’s strategic importance to HSBC Holdings plc, the ratings also incorporate our expectation of ready parental support in times of need.
HSBC Malaysia’s gross impaired loan (GIL) ratio escalated to 5.5% as at end-March 2021 (end-December 2019: 1.9%), mainly because most of the Bank’s retail loans under targeted repayment assistance were conservatively classified as impaired, although not required by Bank Negara Malaysia. Excluding these loans and other differences from industry practice, the Bank’s adjusted GIL ratio would stand at a lower 1.9% (end-December 2019: 1.4%), closer to the industry’s 1.6%. The deterioration in the underlying asset quality during the 15-month period is for the most part attributable to several business accounts and an increase in impaired unsecured loans.
As with other banks, pre-emptive provisioning caused HSBC Malaysia’s credit cost ratio to jump to 92 bps in FY Dec 2020 from 26 bps a year earlier. However, the Bank recorded a net writeback of impairment charges in 1Q FY Dec 2021 as most borrowers exited a blanket six-month repayment moratorium and the economic outlook improved. GIL coverage (including regulatory reserves) was much lower at 45% as at end-March 2021 (end-December 2019: 102%) but the strong collateral coverage supporting an enlarged impaired loan base is a source of comfort. The Bank’s sizeable capital buffer, reflected by a common equity tier-1 capital ratio of 15.4% as at the same date, provides ample headroom against pandemic-induced headwinds.
Successive rate cuts last year narrowed HSBC Malaysia’s net interest margin to 2.2% in FY Dec 2020 (FY Dec 2019: 2.6%) and an annualised 2.0% in 1Q FY Dec 2021. Coupled with hefty pre-emptive impairment charges and a revaluation loss on property, the Bank’s pre-tax profit tumbled to RM0.5 bil in FY Dec 2020 (FY Dec 2019: RM1.3 bil), translating into a return on risk weighted assets of 0.9%. Thanks to the net writeback of provisions, earnings in 1Q FY Dec 2021 fared better than that seen in the previous corresponding period. We expect profitability to improve this year but provisioning needs are still a downside risk.
HSBC Malaysia’s superior funding and liquidity profile remains anchored by high proportions of current and savings account (CASA) deposits and individual deposits, which constituted a respective 61% and 39% of total deposits as at end-March 2021 (industry: 32% and 38%). The Bank’s better-than-industry CASA mix is reflective of its entrenched foothold in cross-border cash management, given its ability to leverage on its parent’s vast network and technical expertise.
Table 1: Issuer and issue ratings of HSBC Malaysia and HSBC Amanah
HSBC Bank Malaysia
HSBC Amanah Malaysia
Tan Shu Xuan
(603) 3385 2497
(603) 3385 2619
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