Published on 24 Aug 2021.
RAM Ratings has reaffirmed United Overseas Bank (Malaysia) Bhd’s (UOB Malaysia or the Bank) AAA/Stable/P1 financial institution ratings as well as the ratings of its debt instruments (Table 1). The reaffirmation reflects our expectation that the Bank’s sound credit metrics will remain around current levels in the next 12-18 months. Healthy pre-provision earnings, strong loan loss coverage and capitalisation are anticipated to sufficiently cushion stress from a difficult environment. The ratings also consider ready parental support from United Overseas Bank Limited, if required, in view of the Bank’s strategic importance to the former.
UOB Malaysia’s gross impaired loan (GIL) ratio edged up to 2.0% as at end-March 2021 (end-December 2019: 1.8%) on account of slippages in its business loan book. Although the headline ratio is higher than the industry’s 1.6%, we highlight that the Bank’s GIL reclassification policy is generally stricter whereby impaired loans regain performing status only when all arrears are regularised.
About 10% of UOB Malaysia’s loans were under relief measures as at end-December 2020 – the latest proportion has likely increased given the reintroduced loan repayment moratorium (on an opt-in basis) granted to individuals and small medium enterprises. Pandemic-driven economic challenges present heightened downside risk to the Bank’s asset quality, which could cause loan impairments to rise when repayment assistance ends. UOB Malaysia’s track record of prudent risk management and sound underwriting practices will help mitigate against significant credit deterioration. Its highly collaterised loan portfolio and sturdy GIL coverage of 114% as at end-March 2021 are also viewed positively.
UOB Malaysia’s sound pre-provision profit is anchored by a steady net interest margin and relatively low cost to income ratio (three-year average: 40%). Sizeable provisioning costs however caused its pre-tax profit to decline 16% y-o-y to RM1.3 bil in FY Dec 2020. Return on risk-weighted assets correspondingly came in at 2.2% (FY Dec 2019: 2.6%), albeit still among the highest in RAM’s rated portfolio. We expect healthy pre-provision earnings to afford it a sufficient buffer to withstand potential credit strains, without affecting its capital position. In 1Q FY Dec 2021, the Bank’s bottom line was broadly similar at RM458.0 mil y-o-y, largely due to lower trading income amid a rise in bond yields.
UOB Malaysia’s strong depositor franchise underlies its sound funding and liquidity profile. The Bank enjoys a wide base of current and savings account (CASA) deposits and individual deposits. CASA balances represented 37% of total customer deposits as at end-March 2021 while retail deposits accounted for over 50% (industry: 32% and 38%, respectively). The Bank’s latest liquidity coverage ratio and net stable funding ratio were above the respective regulatory minimums. With a common equity tier-1 capital ratio of 17.4% as at end-March 2021, UOB Malaysia is among the most well-capitalised banks in the local banking sector (industry average: 14.4%).
RM8 bil Medium Term Notes Programme:
Chow Kah Mun
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Ratings on United Overseas Bank (Malaysia) Bhd