MARC Ratings has affirmed its long- and short-term financial institution (FI) ratings of AA+/MARC-1 on China Construction Bank (Malaysia) Berhad (CCBM) with a stable outlook.

The long-term FI rating of AA+ is notched down from the AAA FI rating of its parent, China Construction Bank Corporation (CCB), accorded based on publicly available information. The one-notch rating differential is in line with MARC Ratings’ notching criteria that considers CCBM as a strategically important subsidiary of CCB. The latter has also given its explicit intent to support and maintain its 100% ownership in CCBM. CCB’s AAA rating considers the Chinese government’s majority ownership and control over the bank and its status as a global systemically important bank (G-SIB), with a 9.9% market share in system loans and 9.7% share in deposits of the Chinese banking industry. CCB is the world’s third-largest bank by asset size, with RMB37.8 trillion as at end-September 2023. 

CCBM’s ratings reflect MARC Ratings’ expectation of high shareholder support from CCB given the parent’s full ownership and strong oversight with key management appointments. CCBM’s business strategy is closely aligned with that of the parent, as the group focuses on its core mandate to support cross-border trading for key projects related to the Belt and Road Initiative (BRI), as well as Chinese businesses operating in Malaysia. The strong support assessment also considers the close alignment between the two banks in key areas, namely operations (via shared branding and resources, allowing CCBM to leverage on the parent’s customer pool and technological system) and key personnel (comprises individuals with longstanding experience within the CCB group). CCBM’s capitalisation as well as funding and liquidity profiles also benefit from its linkages with CCB. As at end-2023, liquidity line from CCB formed 24.3% of CCBM’s total funding. 

While China currently faces economic headwinds particularly from the slump in its real estate sector, the rating agency believes the Chinese government has a high propensity and ability to extend support to CCB, if needed, considering CCB’s systemic importance to China’s banking system. 

Domestically, CCBM’s loan book grew by 2.6x to RM3.1 billion in 2023, driven by loans related to the East Coast Rail Link (ECRL) project. CCBM expects to focus on the BRI and trade financing as well as projects related to environmental, social and governance (ESG) to drive future growth. While MARC Ratings views the economic headwinds in China and the overall challenging economic environment could slow loan growth in the near to medium term, the rating agency believes that CCBM has sufficient capital headroom to grow. The bank’s total capital ratio of 54.1% as at end-2023 indicates healthy headroom to support lending. On asset quality, no impairments have been recorded to date despite loan and customer concentrations in the construction and infrastructure sector. While MARC Ratings views concentration risk to be partly mitigated by the monitoring mechanism that is in place within the CCB group, downside risks remain, especially if there is deterioration in the bank’s large-ticket loans; CCBM’s top five borrowers made up close to 62% of its total loans as at end-2023.

With respect to profitability, CCBM’s net interest income declined by 55.0% y-o-y to RM32.3 million in 2023 (2022: RM71.4 million). Deposit competition and ringgit depreciation (thus costlier interest expense on the bank’s USD-denominated subordinated loan) had put a squeeze on net interest margin, which narrowed to 0.49% in 2023 (2022: 1.35%). Pre-tax profit, however, improved to RM39.8 million in 2023 (2022: RM19.3 million), as higher non-operating interest income (RM88.6 million in 2023) more than offset the decline in net interest income. Looking ahead, MARC Ratings expects stable earnings for CCBM, supported by loan demand from BRI- and ESG-related projects. Meanwhile, CCBM’s Basel III liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) stood at 211.8% and 131.8% as at end-2023, exceeding the minimum regulatory requirements.

The share of investments (in securities such as bonds and money market instruments) to the bank’s total assets declined to 24.9% in 2023 (2022: 49.9%) given the rapid growth in loan book during the year. The credit quality of the investments is high, in MARC Ratings’ view, with the bulk of investments centred around highly liquid and low-risk instruments such as government and government-related securities. The majority of these instruments are short-term in nature (less than a year) and are therefore less susceptible to the impact of interest rate movement. 

The stable rating outlook reflects MARC Ratings’ strong support assessment of CCB, which takes into consideration the rating agency’s view of the parent’s high propensity and ability to provide support, if needed. 

Negative rating pressure could occur if there is evidence of a decline in CCB’s capacity and willingness to support CCBM, or if there is a material weakening in the parent’s credit profile and/or CCBM’s key credit metrics.