MARC has assigned a financial institution rating of AAA on Bank Pembangunan Malaysia Berhad (BPMB). The rating factors in BPMB’s established track record in financing infrastructure and maritime projects, its strong capitalisation, and most importantly, the strong regulatory and government support that it will very likely receive if needed. While MARC considers BPMB’s standalone creditworthiness to be fairly strong, the assigned AAA financial institution rating incorporates some rating uplift from BPMB’s ownership structure and MARC’s expectation that the considerable and timely government support that has been made available to BPMB in the past may be relied upon in the future given the institution’s importance to Malaysia’s economic development. Historically, such support has been extended by way of government guarantees on specific borrowings, as well as compensation for infrastructure loans written off by BPMB. Near-term challenges faced by BPMB include a decline in its low-cost funding sources, short-term interest rate mismatches as well as concentration risk on its loan portfolio. The rating outlook is stable.

BPMB is the only development financial institution (DFI) which specifically caters to capital- intensive industries that include infrastructure projects, maritime and high technology sectors. Historically, BPMB has benefited from multilateral and government-to-government concessional funding. The steady decline of concessional funding since 2005, largely as a result of Malaysia’s rapid economic progression towards a middle-income country, poses a challenge to BPMB. Its funding limitations have also led to some short-term interest rate mismatches, which are currently being addressed by BPMB. In addressing these challenges, BPMB is in the process of enhancing its long-term borrowing capability and broadening its deposit-taking capacity.

BPMB is also inherently exposed to concentration risk due to the large exposure of its loan portfolio to the infrastructure, maritime and high technology sectors as well as the large ticket nature of loans. Additionally, the large ticket lending and long-term nature of these financing activities increases the effect from a default by a single borrower; MARC also believes that this remains a rather unavoidable challenge given BPMB’s business model. Mitigating the concentration risk, however, is the fact that 75% of BPMB’s loan assets are for government- driven projects.

During FY2008, BPMB’s pre-tax profit increased to RM1,082 million from RM379 million in FY2007 thanks to one-off gains of RM394 million as a result of the separation of SME Bank from the BPMB group as well as an increase in net interest income by RM236 million. Consequently, BPMB’s pre-tax ROA increased to 4.52% in FY2008 from 1.65% in FY2007. However, adjusted for the above said one-off gains, its pre-tax ROA in FY2008 would have been lower at 2.87%.

MARC considers BPMB’s capitalisation level to be strong. At end-2008, BPMB’s Risk Weighted Capital Ratio improved to 28.6% from 23.3% a year ago, supported by higher retained earnings and lower risk-weighted assets. BPMB’s capital is comprised of ordinary shares (48%) and reserves (52%). Apart from the stable earnings, BPMB benefits from the strong support of the government, which MARC believes will continue to be extended to BPMB in order to maintain a healthy capital position.

Given BPMB’s DFI business model, pressures on funding and concentration risk are not expected to subside over the medium term. Nevertheless, MARC believes that BPMB should remain resilient thanks to its already strong capitalisation, high level of support extended from the government, improved risk management capability and established track record in infrastructure and maritime funding. This underpins the stable outlook on the rating.

Contacts:
Anandakumar Jegarasasingam 03-2090 2250 / kumar@marc.com.my,
Ahmad Rizal Ahmad Farid 03-2090 2253 / arizal@marc.com.my,
Lim Kok Seng 03-2090 2272 / kokseng@marc.com.my