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RAM Ratings upgrades RHB Bank’s rating to AA1
Published on 17 Aug 2022.
RAM Ratings has upgraded the long-term financial institution ratings of RHB Bank Berhad (the Group) and its banking subsidiaries to AA1 from AA2. All the ratings carry a stable outlook.
Coming on the heels of the revision in the Group’s rating outlook to positive last year, the upgrade reflects sustained improvement in its credit metrics, which have proven to be resilient through the recent pandemic. The rating action also incorporates disciplined execution of business strategies over the years with tangible results. We expect the Group’s strong loss absorption buffers and improved profitability to help mitigate potential near-term asset quality deterioration and maintain its credit profile.
The Group’s portfolio rebalancing strategy in favour of individual and small-medium enterprise loans since 2015 has strengthened its domestic franchise, resulting in evident market share gains for these segments. A gradually diminishing corporate book as an outcome of the strategy also greatly reduces its susceptibility to lumpy impairments, which were the main drag on asset quality in the past. The Group’s overall gross impaired loan (GIL) ratio trended lower to 1.5% as at end-March 2022 (end-December 2020: 1.7%). Standing at 1.4% on the same date, the GIL ratio of its domestic book continued to outperform the industry’s 1.6%, with a small portion of loans (5% of domestic loan portfolio as at end-May 2022) still under repayment assistance.
RHB Bank boasts robust loss absorption buffers. Sizeable management overlays set aside since the start of the pandemic bolstered its loan loss coverage (including regulatory reserves) to 138% as at end-March 2022 (end-December 2020: 121%). At the same time, the Group’s post-dividend common equity tier-1 capital ratio was a sturdy 16.9%, notwithstanding a larger dividend payment last year.
With a five-year (2017-2021) average return on risk weighted assets of 2.4%, RHB Bank’s strong profitability is backed by diversified income sources and disciplined cost management. Its net interest margin grew to 2.2% in 2021 (2020: 2.1%), slightly narrowing to an annualised 2.1% in 1Q 2022. The margin stands to benefit from current rising interest rates, although keener deposit competition may negate some upside. This, coupled with reduced impairment charges and potential writebacks of management overlays when asset quality headwinds subside, may boost RHB Bank’s profit performance. Anticipated synergies from the digital bank formed by the Group and Boost Holdings Sdn Bhd are viewed to be credit positive, although only in the longer term.
The financial institution ratings of the Group’s core subsidiaries, RHB Islamic Bank Berhad and RHB Investment Bank Berhad, are equated to RHB Bank’s, considering their strategic importance to the latter.
Table 1: Ratings of entities under RHB Banking Group|
|
Ratings |
|---|---|
|
RHB Bank Berhad
|
AA1/Stable/P1
AA1/Stable AA1/Stable |
|
RHB Islamic Bank Berhad
|
AA1/Stable/P1 AA2/Stable |
|
RHB Investment Bank Berhad
|
AA1/Stable/P1
AA1/Stable |
Analytical contacts
Tan Shu Xuan
(603) 3385 2497
shuxuan@ram.com.my
Sophia Lee
(603) 3385 2619
sophia@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 2022 by RAM Rating Services Berhad
Rating Rationale: RHB Bank Berhad
Rating Rationale: RHB Islamic Bank Berhad
