No immediate rating impact from Sabah Development Bank’s and Sabah Development Berhad’s restructuring plan

Published on 25 Aug 2023.

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RAM Ratings views the announcement made by the Chief Minister of Sabah on 11 August 2023 regarding a series of actions by the state government to strengthen support for Sabah Development Bank Berhad (SD Bank or the Bank) to be a long-term credit positive for the Bank. 

SD Bank’s issue ratings were last affirmed at AA1/Stable in May 2023, premised on expectation of extraordinary support from the Sabah state government in times of distress. The Bank plays a crucial role in fostering socio-economic development in Sabah and enjoys a strong relationship with the state government. Sabah Development Berhad’s (SD Berhad) – the Bank’s current parent company and funding vehicle and investment arm of the Sabah state government – issue rating was last affirmed at AAA/Stable in March 2023 (Table 1).

Presently 100% owned by SD Berhad, SD Bank would be brought under the purview of the Sabah Chief Minister’s Department, with the Sabah Ministry of Finance having direct supervision of the Bank, the statement said. A new board of directors has also been established to oversee the transformation of SD Bank. Concurrent with the restructuring of ownership, we understand from SD Bank management that a new independent division within the Bank – consisting of experienced professionals and reporting directly to the board – has been put in place to solely focus on the recovery of the Bank’s sizeable base of impaired loans. 

Although SD Bank ceased lending to Peninsular Malaysia a few years ago, going forward, there will be a greater emphasis to focus on funding socially and economically meaningful as well as environmentally responsible development projects in Sabah. As at end-2022, SD Bank’s exposures to the peninsula was sizeable at 38% of gross loans and somewhat misaligned with its public policy role and mandate of advancing Sabah’s development, besides being a source of notable asset quality stress. 

These measures we believe, reflect the state government’s serious intent and commitment to restore SD Bank’s credit metrics such that it is able to effectively execute its strategic role in supporting the state’s development agenda. While viewed by RAM as positive for the Bank, any meaningful improvements to its intrinsic strength and financial metrics will take time to materialise. SD Bank’s ratings may be upgraded when Peninsular Malaysia loans decline significantly, loss absorption buffers strengthen or asset quality improves.

As part of the restructuring exercise and realignment to State objectives to consolidate of its oil and gas (O&G) assets, SD Berhad’s 100%-stake in Sabah International Petroleum Sdn Bhd (SIP) will also be transferred to SMJ Sdn Bhd (SMJ, proposed MTN programme rated AAA/Stable). SMJ is wholly-owned by the State and oversees the State’s interest in O&G developments. SMJ plans to issue up to RM1.2 bil sukuk from its proposed Multi-Currency Islamic Medium-Term Notes (Sukuk Wakalah) Programme of up to RM10.0 billion to fund costs in relation to the acquisition of SIP. With this move, we expect that the majority of the loans and advances extended by SD Bank to SIP will be repaid in the near future, thereby enhancing the Bank’s liquidity position.

Following the restructuring, some adjustments may be made to SD Berhad’s Sukuk programme's terms. That being said, we note that the State remains committed to supporting the sukuk programme, with the proceeds used to finance other crucial development projects. Until these changes are finalised, there are no planned issuances. There is currently no outstanding sukuk. We will provide an update once more details are made available to us.

Table 1: SD Bank’s and SD Berhad’s debt programme ratings

 

Analytical contacts
Wong Yin Ching, CFA
(603) 3385 2555
yinching@ram.com.my

Thong Mun Wai
(603) 3385 2522
munwai@ram.com.my

 

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