CHINA CONSTRUCTION BANK (MALAYSIA) BERHAD - 2019

MARC has assigned long- and short-term financial institution (FI) ratings of AA+/MARC-1 to China Construction Bank (Malaysia) Berhad (CCBM). The long-term rating of CCBM is notched down from its parent China Construction Bank Corporation’s (CCB) AAA rating from MARC based on publicly available information. The outlook on all ratings is stable. The one-notch long-term rating differential between CCBM and CCB is underscored by the explicit intent of support extended to the subsidiary by the parent, CCB’s 100%-ownership in CCBM and the common branding that exists between the two institutions.

CCB’s ratings primarily reflect its significant banking franchise in China as the second-largest bank domestically, its healthy financial performance, its majority-owned status by the Chinese government and its systemic importance to China’s financial system and economy. Registering total assets of about RMB23.2 trillion as at end-2018, CCB is also a key global systemically important financial institution as designated by the Financial Stability Board (FSB), subjecting the bank to tight supervision and strong regulatory requirements. CCB has also steadily expanded its international presence to 29 countries including Malaysia, where it established CCBM in 2016.

MARC notes that CCBM has a policy role to support China-based companies undertaking infrastructure projects in Malaysia under China’s Belt and Road Initiatives (BRI) framework. It has extended funding to key BRI-related infrastructure projects to date. Additionally, the bank finances other China-based companies entering the Malaysian market, and at the same time seeks to expand its lending to local entities. The rating agency believes CCBM will be able to strengthen its market share in Malaysia by leveraging on its parent’s existing pool of customers and shared resources. Notwithstanding this support, CCBM is expected to face competitive pressure from existing players in the domestic banking industry.

CCBM’s total assets and gross loans have grown sharply to RM4.4 billion and RM2.3 billion as at end-2018 (2017: RM2.7 billion; RM1.3 billion), although they remain modest, accounting for about 0.1% of the domestic banking sector’s gross loans as at end-2018. For 1Q2019, loan growth momentum has continued from the financing of some large projects. MARC notes that the bank is also involved in the renminbi clearing business, which is expected to contribute to its non-interest income. Given its nascent growth stage, CCBM recorded a turnaround in net profit to a modest RM11.5 million for 2018. The cost-to-income ratio of 70.2% is expected to moderate over time as its earnings base expands. Its CET1 and total capital ratios of 34.4% and 35.0% as at end-2018 provide sufficient headroom for loan expansion. However, if the pace of loan growth is higher than expected, MARC expects capital support from its parent would be forthcoming.

Going forward, steady loan growth would enable CCBM to widen its customer base, thereby reducing its current loan book concentration where three of its largest borrowers collectively accounted for 30.8% of total gross loans as at end-2018. In respect of funding, MARC draws comfort from parent bank CCB’s assistance to CCBM via long-term money market borrowings and short-term funding lines to support the bank’s liquidity. The bank’s Basel III liquidity coverage ratio (LCR) stood at 133.4% as at end-2018, exceeding the minimum regulatory requirement of 100% in 2019.

Major Rating Factors

Strengths

• Very high probability of support extended by parent China Construction Bank, the second-largest banking group in the world; and
• Benefit from the growth of China-based companies in Malaysia.

Challenges/Risks

• Modest operational track record given its recent establishment domestically; and
• Intense competition in the domestic banking sector.