MARC has assigned its long-term and short-term financial institution ratings of AAA/MARC-1 to Malayan Banking Berhad (Maybank). The ratings reflect Maybank’s entrenched market position as the largest commercial bank in Malaysia, strong financial profile with adequate capitalisation and liquidity, improving asset quality and resilient recurring earnings stream from its geographically diversified banking business. The ratings are assigned based on Maybank’s strong standalone credit profile without specific uplift for potential government or regulatory support. Nonetheless, MARC opines that the likelihood of systemic support for Maybank is high due to its status as the largest domestic bank and financial group. The outlook on the long-term rating is stable.

As at end-FY2010 (June 2010), the Maybank Group is the largest banking group in Malaysia and fourth largest in Southeast Asia based on its asset size of RM336.7 billion. Professionally managed by an experienced and capable team, Maybank continues to leverage on the momentum established by its dominant market position in Malaysia. The bank maintains substantial market share within the corporate, small and medium enterprises (SME) and retail banking segments on account of its extensive network of over 380 branches spanning the entire country, well supplemented by its strong internet banking platform. Maybank has been expanding its regional foothold in recent years by way of growing its overseas branch network and making equity investments in local financial institutions in Indonesia, Vietnam and Pakistan, of which the RM8 billion acquisition of PT Bank Internasional Indonesia (BII) in FY2009 represents its largest overseas investment to date. Maybank is currently in the midst of acquiring Singapore stockbroker Kim Eng Holdings Ltd. The acquisition is expected to expand the group’s investment banking franchise and address an important gap in its currently commercial and retail banking-focused regional coverage.

Overseas loans and advances accounted for 32% of the group’s loan balance as at end-June 2010, of which, Singapore’s contribution alone made up 19% of the group’s loan book, followed by 8% from Indonesia-based banking subsidiaries. While the move to diversify its revenue base away from the competitive domestic market would benefit the bank’s franchise and performance over the long term, in MARC’s view, it also exposes the bank to near-term execution risks. The success of Maybank’s overseas expansion hinges on its ability to manage its exposure to emerging market risk and unique operating challenges in its key markets.

Maybank’s financial performance improved in FY2010 with return on assets (ROA) increasing to 1.46% from -0.14% in the previous year. This was mainly attributed to the absence of RM2.8 billion impairment losses for its overseas ventures incurred during the previous year and the improvement in loan quality (with the gross non-performing loan (NPL) ratio improving to 3.0% at end-FY2010 from 3.4% at end-FY2009) resulting in the decline in allowance for loan losses by 71%. In addition, net interest income grew by 8% on the back of a larger interest-bearing asset base, while non-interest income such as fee income and investment returns increased in line with the improving economic environment. MARC notes that the high portion of low-cost deposits, namely current deposits and saving deposits (CASA), has always been a factor supporting the bank’s net interest margins; CASA deposits accounted for 38.7% of customer deposits as at end-1HFY2011 (FY2009: 38.1%).

At the group level, subsidiaries generally showed improved performances during FY2010. The net profits of main overseas subsidiary BII increased to IDR498 billion for the 12 months ended June 2010 from IDR14 billion a year ago. Maybank’s Islamic banking arm, Maybank Islamic Berhad, meanwhile, showed sustained positive earnings momentum, evidenced by double-digit asset growth and higher profits since its incorporation in FY2008. The group’s financial results were stable moving into the first half of FY2011 (1HFY2011) represented by an annualised return on assets (ROA) of 1.26% (FY2010: 1.23%). Meanwhile, at the bank level, annualised ROA declined marginally to 1.35% during 1HFY2011 compared to FY2010 as a result of lower fees and dividend income.
 
On the asset quality front, Maybank’s impaired loan ratio increased to 4.5% at end-1HFY2011 following the adoption of a more stringent approach to impaired loan classifications under FRS 139. On a separate note, the adoption of the Basel II’s internal rating-based (IRB) approach to measuring credit risk and use of the standardised approach for operational risk has resulted in an increase in risk-weighted assets and comparatively higher capital charges, causing the bank’s total capital adequacy ratio (CAR) to decline to 13.0% at end-1HFY2011 from 13.8% at end-FY2010. During 2010, the bank introduced a dividend reinvestment scheme under which shareholders are given the option to reinvest their dividends in Maybank shares. The reinvestment plan could potentially improve the bank’s total CAR to 13.7%, a little lower than the Malaysian commercial banking sector’s CAR of 14.2% as at end-December 2010, assuming reinvestment of the entire electable portion of declared dividends. 

The sustainability of Maybank’s near-term financial performance hinges on its ability to maintain stable underlying profitability and asset quality, while its  long-term prospects hinge on its ability to extract value from its overseas ventures. The stable outlook on the rating reflects MARC’s expectations that Maybank would be able to maintain its favourable financial profile going forward, underpinned by its established franchise, strong funding profile and recurring income base.

Contacts:
Lim Kok Seng, +603-2082 2272 / kokseng@marc.com.my;
Ahmad Rizal Farid, +603-2082 2253 / arizal@marc.com.my;
Anandakumar Jegarasasingam, +603-2082 2250 / kumar@marc.com.my.