Published on 07 Jun 2023.
RAM Ratings has affirmed Bank Muamalat Malaysia Berhad’s (the Bank) financial institution ratings (FIRs) at A2/Stable/P1.
The ratings consider the Bank’s sound capitalisation and sturdy gross impaired financing (GIF) coverage, which afford a healthy loss absorption buffer against potential asset quality weakening from the seasoning of the Bank’s fast-growing financing portfolio. We have also affirmed the A3/Stable rating of the Bank’s RM1 billion Subordinated Sukuk Murabahah Programme (2016/2036). The one-notch difference between the Bank’s long-term FIR and the rating of the subordinated sukuk reflects the subordination of the facility to the Bank’s senior unsecured obligations.
Bank Muamalat’s GIF ratio remained unchanged at 0.8% as at end-December 2022 (industry: 1.7%; end-December 2021: 0.8%), skewed by the base effect from its rapidly expanding financing book (2022: +16.4%; Islamic banking industry: +11.9%). We are watchful of the Bank’s continued double-digit growth strategy for 2023. The GIF ratio is anticipated to trend up as the Bank’s financing book seasons amid higher inflation and borrowing costs, although the deterioration would be partly mitigated by salary transfer arrangements (roughly 25% of financing). Under this arrangement, personal financing (PF) customers maintain salary accounts with the Bank, from which payments are deducted after salaries are credited.
Financing growth in 2022 was led by the Bank’s residential mortgage (+27%) and PF (+20%) portfolios. Representing a sizeable 28% of its financing base, Bank Muamalat’s PF segment is largely focused on civil servants (77%). Over the last two years, the Bank has diversified its PF book to include private sector employees (mainly professionals), largely accompanied by standing instruction orders. We draw comfort from the still high proportion of PF repaid through salary transfers (84%), which reduces default risk. Going forward, Bank Muamalat will focus on PF under the newly introduced Accountant General salary deduction scheme, which is viewed favourably given the better credit risk profile of this financing facility.
GIF coverage was sturdy at 171% as at end-2022 (end-2021: 148%) due to pre-emptive provisioning during the pandemic. The Bank’s common equity tier-1 capital ratio declined to 12.5% as at end-2022 (end-2021: 13.6%) owing to strong financing growth but is deemed sound.
In line with the Bank’s initiative to reduce depositor concentration risk, deposits growth of 13.9% in FY Dec 2022 (FY Dec 2021: +7.5%) was largely driven by corporates and small and medium enterprises (SME). The ten largest non-bank depositors – mostly comprising of government-related depositors – made up 36% of total deposits (end-2021: 38%), which is still lofty. Bank Muamalat’s retail deposit franchise remained modest, with individual deposits accounting for only 10% of total deposits (industry: 38%). The recently launched unrestricted investment account for non-retail customers is an additional avenue to diversify the Bank’s funding sources. This segment remains small.
Profit before tax increased 20.3% to RM307 mil in FY Dec 2022, primarily due to higher financing income, underpinned by strong financing growth and a broader net financing margin (NFM). Bank Muamalat’s NFM widened to 2.58% (+8 bps) following a series of rate hikes in 2022, standing among the highest in the industry in view of a large proportion of high-yielding PF facilities. The Bank’s cost to income ratio of 57% is still higher than the industry’s 43%, despite having eased in the past few years. Return on risk-weighted assets and return on assets rose slightly to 1.5% and 1.0%, respectively, but are weaker relative to peers’. Margin compression is likely in 2023 although the absence of a windfall tax would support the Bank’s bottom line.
Johan Bin Faizul
(603) 3385 2518
Wong Yin Ching, CFA
(603) 3385 2555
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Ratings on Bank Muamalat Malaysia Berhad