Published on 23 May 2023.
RAM Ratings has affirmed the AA1/Stable/P1 ratings of Sabah Development Bank Berhad’s (SDB or the Bank) debt instruments (Table 1) on expectation of extraordinary support from the Sabah state government in times of distress.
SDB plays a strategic role in fostering Sabah’s socio-economic development. In view of its strong relationship with the state government, state backing has been demonstrated through sizeable deposit placements, business referrals and letters of support for the Bank’s debt securities and borrowings. The Sabah Ministry of Finance has direct oversight of SDB through representation on the Bank’s board of directors.
With a gross impaired loan (GIL) ratio of 47.5% and GIL coverage of sub-30% as at end-2022, SDB’s asset quality remains poor though this is not unusual for development financial institutions. The Bank’s loan book is lumpy and significantly concentrated in the real estate and construction sectors, which make up more than half of total loans. Additionally, the Bank continues to have a high exposure to peninsula borrowers (38% of loan base). Efforts to pare down these loans have been hampered by Covid-19 disruptions over the last few years. Under a new leadership since late 2020, SDB has fortified risk management and ramped up recovery efforts. Although viewed positively, such remedial actions require time to bear results.
SDB generated a pre-tax profit of RM84 mil in 2022, its tier-1 capital ratio standing at 14.7%. These loss absorption buffers are highly susceptible to impairment risk, given the Bank’s high GILs and low coverage. While GILs are well-secured by properties, disposals and security values are dependent on market conditions. Alongside the state government, SDB is considering a restructuring exercise to settle all or part of its related-party and government-linked company loans and advances. The exercise is intended to free up capital and funding, allowing the Bank to finance other projects in Sabah that could have a greater developmental impact.
Table 1: Ratings of SDB’s debt programmes
Lee Yee Von
(603) 3385 2503
Wong Yin Ching, CFA
(603) 3385 2555
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Ratings on Sabah Development Bank Berhad