MARC Ratings has affirmed its financial institution (FI) rating of A+ on MBSB Bank Berhad and concurrently affirmed its A+_IS rating on MBSB Bank’s RM5.0 billion Sukuk Wakalah programme. The ratings outlook is stable. 

MBSB Bank’s sound capitalisation levels and strong support from its ultimate shareholder Employees Provident Fund (EPF) remain key rating drivers. The rating is moderated by MBSB Bank’s weaker-than-industry average asset quality metrics and execution risk arising from the bank’s plan to expand its corporate financing portfolio. 

For 1H2022, MBSB Bank’s gross impaired financing (GIF) ratio rose to 5.08% (Islamic banking industry average: 1.55%), mainly from the corporate financing segment due to the expiry of relief measures. As at end-1H2022, about 1.9% of total financing were under relief programmes (2021: 50.8%). Additionally, personal financing which remains the bulk of the bank’s financing book at 55.0% also recorded a higher GIF ratio of 1.45% (1H2021: 0.87%). This increase was recorded from the bank’s non-salary deductible personal financing facilities which constituted 10% of the total personal financing amount. MARC Ratings draws some comfort that the majority of the bank’s personal financing is granted to government servants and therefore, non-repayment risk is mitigated by salary deduction at source. 

MBSB Bank’s total financing grew by 4.5% y-o-y to RM36.0 billion as at end-June 2022 with the growth mainly stemming from the residential property and working capital segments. Going forward, it aims to extend working capital financing to corporates to achieve its target of a corporate-retail mix of 60:40 under its corporate strategy, Journey 2025, from the current mix of 22:78. MBSB Bank’s capitalisation remains sound with Common Equity Tier 1 (CET1) and total capital ratios standing at 15.2% and 19.8% as at end-June 2022 (2021: 17.2% and 21.8%), providing a buffer against increases in credit impairments. In addition, the holding company had, in September 2022, completed a capital injection of RM1.0 billion to MBSB Bank, via the issuance of ordinary shares. This further strengthened the bank’s capitalisation level with CET1 and total capital ratios improving to 17.7% and 22.3% as at end-September 2022. 

For 1H2022, MBSB Bank registered lower pre-tax profit of RM284.8 million (1H2021: RM633.7 million) due to higher impairment charges of RM210.7 million as the relief measures cease (1H2021: writeback of RM87.7 million). The bank’s return on assets (ROA) and return on equity (ROE) stood at 0.91% and 6.78% during the period, comparable to its 2021 ratios. Moving forward, MARC Ratings expects the consecutive hikes in the overnight policy rate (OPR) since May 2022 by 75 bps and potential increases in the future would compress the bank’s margins given the bank’s sizeable fixed-rate financing.

MBSB Bank’s top 10 depositors accounted for 42.9% of total deposits as at end-1H2022. Concentration risk is mitigated by the fact that these depositors are largely government-related entities which we consider to be stable. The bank has a modest retail depositor composition of 15.5% (industry average: 18.6%). MBSB Bank also has ready accessibility to long-term financing from its existing RM5.0 billion programme to further diversify its funding source. EPF as the major shareholder of MBSB with a 65.9% interest is expected to continue supporting the bank. This has also been evident in the dividend reinvestment scheme that bolstered MBSB Bank’s capital base. 

The holding company, Malaysia Building Society Berhad (MBSB), is currently in the negotiation stage for the proposed acquisition of Permodalan Nasional Berhad’s shareholding in Malaysian Industrial Development Finance Berhad (MIDF). MARC Ratings understands that this will be done via a share swap. The acquisition of MIDF would complement MBSB’s banking operations as it provides an avenue for MBSB to diversify its business operations through MIDF’s capital market activities as well as asset management and stockbroking businesses. If materialised, MBSB’s total asset size would increase by 16.8% to RM59.4 billion. Following the potential acquisition, MARC Ratings understands that MBSB’s plan to collapse the financial holding company structure and lift the banking unit to the apex of the group has been put on hold. 

The stable outlook assumes that MBSB Bank’s performance will remain broadly in line with its current profile, with strong capitalisation levels and a GIF ratio that is within expectations. The stable outlook also assumes that EPF will remain the major shareholder of the group.

Any upward revision to the bank’s rating would mainly be guided by a sustained growth in profitability and a decline in GIF ratio to the industry level while other parameters, particularly capitalisation levels, remain strong.

The rating and/or outlook would come under pressure if the bank’s asset quality metrics worsen significantly without remedial measures being put in place and/or there is a weakening in shareholder support from EPF.