Bank Pembangunan Malaysia Bhd - 2010

MARC has affirmed its financial institution rating on Bank Pembangunan Malaysia Berhad (BPMB) at AAA with a stable outlook. The rating reflects BPMB’s status as a wholly government-owned development financial institution (DFI), held through the Minister of Finance Incorporated (99.99%) and the Federal Lands Commissioner (0.01%). The rating also considers BPMB’s long track record of managing government-borrowed funds for lending towards key development sectors, which provides a high degree of certainty that BPMB will continue to receive the necessary regulatory and government support to maintain its strategic role in the Malaysian economy. MARC’s support assumption is based on practical demonstration of support in the past which have taken the form of government guarantees on borrowings, compensation for specific projects and capital support. Our assumption of a very high probability of timely financial support continues to underpin the rating uplift above BPMB’s already fairly strong stand-alone credit rating.

BPMB is a DFI which specifically caters to capital-intensive industries, covering the infrastructure, maritime and high technology sectors. In the past, BPMB benefited from multilateral and government-to-government concessional funding. Nevertheless, the supply of concessional funding has declined over the past years due to Malaysia’s improving per capita income. This decline in concessional funding has led the DFI to increasingly tap the capital markets to address some of its short-term interest rate mismatches. Moving forward, BPMB has expressed its intention to diversify its deposit-taking capacity.

BPMB’s lending exposures reflects its development mandate to provide financing especially for the infrastructure sector. Its long-tenure and large ticket infrastructure loans exposes it to higher credit risk. Its loan book distribution suggests that a single borrower default can have substantial impact on BPMB. Mitigating this concern to some extent is the observation that 77.0% of BPMB’s lending as at March 31, 2010 relate to government-initiated projects which carry some form of government support. This explains its benign historical experience on borrower loss given default. Additionally, MARC notes that the capitalisation of BPMB is strong, providing sufficient capacity to comfortably absorb credit costs associated with large ticket lending towards the infrastructure sector.

For financial year-end December 31, 2009 (FY2009), BPMB recorded lower profitability on account of higher specific allowance on non-performing loans during the year as well as the management’s proactive action to book provisions for potential future delinquencies arising from its current performing loan book. Consequently, post-tax return on assets (ROA) registered lower at 1.47% (FY2008 post-tax ROA after adjusting for a one-off gain: 2.83%).

The bank’s risk bearing capacity is strong as reflected by its Tier-1 capital ratio and risk weighted capital ratio (after deducting proposed dividend) of 30.09% and 31.12% respectively, comprised mainly of paid-up share capital and retained earnings. MARC views this positively as BPMB’s capitalisation provides for an ample buffer against potential credit costs in light of the concentration risk which BPMB faces from its infrastructure lending. In addition to a stable earnings profile, MARC also expects BPMB to continue to execute its mission as a key development financial institution successfully, therefore earning the continued financial support of the government.

Whilst BPMB’s developmental mandate and its related business model will inevitably expose it to higher credit risks, MARC believes that the stable rating outlook on BPMB is adequately supported by its strong capitalisation arising from its stable profit generation, expected continuous government support, continuous enhancement of risk management standards, and historically low loss given default.

Strengths

Challenges