MARC Ratings has upgraded Bank Muamalat Malaysia Berhad’s (Bank Muamalat) financial institution (FI) ratings to A+/MARC-1 from A/MARC-1 and concurrently upgraded the rating on the bank’s Islamic Senior Notes Programme (Senior Sukuk) of up to RM2.0 billion to A+_IS. The ratings outlook is stable. 

The ratings upgrade is premised on Bank Muamalat’s continued improvement in its financial performance, particularly its asset quality and profitability metrics which are in line with its peers in the same rating band. The bank has maintained its financing growth trend since 2018. The improved credit metrics were also achieved on the back of healthy capitalisation levels.

The bank’s financing book grew 14.5% y-o-y to RM20.9 billion in 2021, maintaining the growth momentum that began in 2018 (2020: 14.1%). This is significantly higher than the Islamic banking industry’s average financing growth of 8.3% recorded in 2021. Personal financing continued to anchor the financing growth with a 27.2% y-o-y increase to RM6.3 billion. Personal financing (30.4%) and residential property financing (26.9%) continued to form the key component of Bank Muamalat’s total financing. Bank Muamalat’s market share in gross financing and total deposits of the domestic Islamic banking industry remained modest at 2.9% and 3.3% in 2021 (2020: 2.7% and 3.3%), largely reflecting its smaller scale and network of 67 branches. This is in contrast with its Islamic bank–backed peers that can leverage on the infrastructure and resources of their parent banks. 

Bank Muamalat registered higher pre-tax profit of RM256.6 million in 2021 (2020: RM174.8 million), attributed to a larger financing base and higher net financing income. The bank’s net financing income rose by 21.8% y-o-y to RM664.5 million, leading to a broader net financing margin of 2.56% in 2021 (2020: 2.34%). During the period, the bank registered return on assets (ROA) and return on equity (ROE) of 0.60% and 5.89% (2020: 0.71%; 6.75%).

Gross impaired financing (GIF) ratio declined to 0.83% (2020: 1.07%) and is lower compared to the industry average of 1.25%. The improvement in Bank Muamalat’s asset quality was attributed to the larger financing base and, to some extent, aided by relief assistance offered to its customers. MARC Ratings notes that about 28.7% (2020: 57.0%) of its total financing is in its assistance measures. Common Equity Tier 1 (CET1) and total capital ratios stood at 13.7% and 17.3% as at end-2021, well above the minimum regulatory requirement. The bank’s healthy capitalisation levels should provide a buffer against any weakening in its asset quality once the extended relief assistance ceases. 

Bank Muamalat’s customer deposits increased to RM23.1 billion in 2021. The bank continued to rely on wholesale funding which accounted for 70.9% of total funding as at end-2021. The retail deposit franchise remained modest with individual deposits accounting for only 11.1%. The proportion of current and savings account (CASA) deposits declined marginally to 35.3% (2020: 36.1%), though it remains higher than the industry average of 27.9%. Its liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) stood well above the required level at 133.2% and 109.3% (2020: 115.9%, 108.0%).

Bank Muamalat is majority owned by DRB-HICOM Berhad. MARC Ratings notes that DRB-HICOM has not divested its stake in Bank Muamalat from 70% to 40% as mandated by Bank Negara Malaysia (BNM) and as an alternative route, is currently looking at listing the bank. Bank Muamalat’s capital base is supported by dividend retention as Bank Muamalat is prohibited from upstreaming dividend to its shareholders until DRB-HICOM pares down its stake in the bank to 40%.

The stable outlook reflects MARC Ratings’ expectation that Bank Muamalat would maintain its profitability trend and asset quality metrics over the near term.

The ratings and/or outlook could be upgraded if the bank continues to balance its financing growth while maintaining its track record of sound asset quality and healthy capitalisation metrics.

Any change in rating and/or outlook would be driven by sharp weakening in the bank’s asset quality and profitability measures.