View Credit Analysis Report (605389034)

SubcategoryFinance - Financial Institution
Date Article2021-08-19 00:00:00
Rating action     
MARC has assigned its financial institution (FI) rating of AAA to Bank Pertanian Malaysia Berhad (Agrobank). Concurrently, the rating agency has assigned a preliminary rating of AAAIS to the bank’s proposed RM1.0 billion Islamic Medium-Term Notes Programme (IMTN programme). The ratings outlook is stable.

The FI rating reflects Agrobank’s status as a wholly government-owned development financial institution (DFI) to which government support has continued to be forthcoming by way of government grants and financing scheme funds at favourable rates as well as placement of deposits from government entities. Agrobank is mandated to chart the growth and development of Malaysia’s agriculture sector. The DFI is also regulated by Bank Negara Malaysia (BNM), and its financing activities are guided by policies set by the Ministry of Agriculture and Food Industries (MAFI). 

Agrobank has been assisting the government in supporting Small-Medium Enterprises (SMEs) in light of financial difficulties caused by the COVID-19 pandemic. This includes channelling working capital financing to SMEs under BNM’s RM5.0 billion Stimulus Package 2020. This spurred the bank’s financing growth to RM13.2 billion as at end-2020 (2019: RM11.8 billion).

The DFI continues to benefit from funding support from the government as well as other public entities. As of end-2020, deposits from the government or related entities constituted 30.4% of the DFI’s funding by way of deposits from entities such as Employees Provident Fund (EPF), EXIM Bank of Malaysia and Lembaga Pembiayaan Perumahan Sektor Awam (LPPSA). Meanwhile, financing scheme funds and direct grants from the government or BNM accounted for 21.1% of total funding for the same period.

Agrobank remains a core financier to the agriculture industry, having a leading market share of around 40.5% in agrofood, with a dominant position in the livestock and fisheries segments. Agrobank’s financing book largely comprises financing to the agrofood (livestock, fisheries, crops, etc.) and non-food (commodities and agro-based processing and support) segments, which made up 38.0% and 52.6% of total financing as at end-2020. 

For 2020, the DFI’s net profit fell sharply to RM27.9 million (2019: RM148.5 million), largely due to higher provision of RM208.4 million (2019: RM22.0 million). Additionally, as its financing loss reserve ratio stood lower at 64.4% as at end-2020, well below the 100% level, this may necessitate further provision to be made that may increase downward pressure on future earnings.

The DFI’s gross impaired financing (GIF) has been on an upward trend, increasing to RM866.7 million as at end-2020 (2019: 511.7 million). The spike in new impairments over the period, which was largely accrued from the crops segment, resulted in Agrobank’s GIF ratio weakening to 6.6% (2019: 4.3%). GIF ratio however has remained lower compared to other DFIs, mainly due to its large personal financing segment, where Agrobank deducts financing repayments directly from civil servant salaries via its access to Angkatan Koperasi Kebangsaan Malaysia Berhad (Angkasa). 

However, the full extent of the DFI’s underlying asset quality issues continues to be clouded by the financing moratorium as well as rescheduling and restructuring (R&R) programmes. Clarity should improve with the withdrawal of the debt relief programmes in the coming months. Amid the pandemic containment measures with Malaysia still under varying levels of lockdown and given the time-consuming national vaccination programme, economic recovery is likely to be uneven. Therefore, the risk of further decline in asset quality cannot be fully discounted at this juncture.

Agrobank’s risk-bearing capacity is deemed strong as reflected by its core capital ratio (CCR) and risk-weighted capital ratio (RWCR) of 20.7% and 24.7% as at end-2020, which mainly comprised paid-up share capital and reserves. Its current capitalisation level provides some buffer to withstand asset quality weakening.

Rating outlook     
The stable outlook reflects MARC’s expectation of ready government support when required. 

Rating trajectory

Downside scenario     
The rating will come under pressure if there is an explicit decline in financial and/or operational support from the government.

Key strengths
  • Wholly government-owned development financial institution
  • Long track record and expertise in providing financing to the agriculture sector
Key risk
  • Profit performance remains vulnerable to impairment charges

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