MALAYAN BANKING BERHAD - 2018

MARC has affirmed Malayan Banking Berhad’s (Maybank) financial institution (FI) ratings at AAA/MARC-1 and its RM10.0 billion Senior Medium-Term Notes (MTN) programme at AAA. The FI and issue ratings are based on a national rating scale.

MARC has also assigned an intrinsic credit strength rating (ICSR) of A-_ND to the bank. The ICSR is based on an international rating scale and is premised on Maybank’s standalone credit profile without incorporating any external support. Among the key factors the ICSR takes into consideration are banking franchise, capital base, asset quality and profitability. (Refer to MARC’s methodology on ICSR: Financial Institutions Rating Criteria.) The outlook on all ratings is stable.

The ratings are premised primarily on Maybank group’s well-established banking franchise domestically and in the region, its moderately healthy asset quality metrics despite some weakening in recent years, its sound capital base and resilient profitability. The stable outlook on all ratings reflects MARC’s expectations that the group will sustain its healthy credit profile as it faces domestic and regional headwinds arising from resurgent economic challenges.

For 1Q2018, Maybank group’s overall loan growth was marginally higher at 5.8% y-o-y (1Q2017: 5.6%) mainly driven by growth in its key markets of Malaysia, Singapore and Indonesia, as well as lower loan contractions in Hong Kong. The moderate loan growth is in line with the group’s approach of not pursuing rapid growth at the expense of a reasonable profit margin. As at end-March 2018, Maybank group’s largest exposure is to its domestic market at 59.3% of total consolidated loans of RM493.4 billion, followed by Singapore at 25.0% and Indonesia at 7.2%. Over the near term, overall loan growth is expected to remain muted, driven by lower loan demand from the domestic corporate sector.

Maybank’s consolidated gross impaired loans (GIL) ratio rose marginally to 2.34% at end-2017 from 2.28% in the previous year, largely due to higher impairments from the oil and gas sector, mainly in its Singapore operations where the GIL ratio increased to 2.36% from 1.31% in 2016. Exposure to the oil and gas sector stood at 3.54% of total consolidated loans, of which only 17% has been classified as impaired as at end-2017. MARC understands that impairments from the oil and gas sector have peaked; however, MARC estimates the group’s GIL ratio could potentially increase by about 0.43% over the near term due to the group’s exposure to a troubled water and power company in Singapore.

For 1Q2018, the GIL ratio increased marginally to 2.37% largely due to a one-off increase of RM550.8 million in GILs following the adoption of Malaysian Financial Reporting Standards (MFRS) 9. Excluding effects from the implementation of MFRS 9, the banking group’s GIL ratio would improve to 2.26%. Going forward, the banking group’s asset quality could face moderate downside risk amid external uncertainties such as trade wars between the US and China, and future policy direction under the new government in Malaysia. As at end-March 2018, loan loss coverage increased to 87.8% (end-2017: 71.5%).

Maybank group’s capitalisation remains sound. The decline in its consolidated common equity Tier 1 (CET1) capital ratio to 14.3% as at end-March 2018 (end-2017: 14.8%) was largely due to a one-off impact from the adoption of MFRS 9. Nonetheless, the capital ratio remained higher than the domestic banking average of 13.2%, exceeding the regulatory requirement of 7.0% (including capital conservation buffer) effective January 1, 2019. Group profitability remains robust with profit after tax increasing by 12.0% y-o-y to RM7.8 billion, supported by improved net interest margin of 2.25% (2016: 2.16%) and lower impairment charges of RM2.0 billion (2016: RM2.8 billion). For 1Q2018, Maybank group maintained its profitability growth, with net profit increasing 8.8% y-o-y to RM1.9 billion.

Maybank group’s funding and liquidity profile is strong, underpinned by a substantial retail deposit base and good access to the capital market. As at end-March 2018, the group’s loans-to-customer deposit and loans-to-fund ratios improved slightly to 91.1% and 82.0%. MARC notes that deposits from individuals continued to account for a sizeable portion of total customer deposits at 39.6% as at end-March 2018. In terms of liquidity position, the group’s liquidity coverage ratio increased to 153.3% in 1Q2018 (end-2017: 133.1%) which was above BNM’s minimum requirement of 100% in 2019.

Major Rating Factors

Strengths

• Very strong domestic competitive position;
• Strong capital base; and
• Sound funding and liquidity profile.

Challenges/Risks

• Keen competition within domestic banking sector; and
• Moderate asset quality.