MARC has affirmed its long-term and short-term financial institution ratings of AAA/MARC-1 with a stable outlook on Malayan Banking Berhad (Maybank). Maybank is the major operating entity and financial holding company of the Maybank Group which is engaged in conventional and Islamic banking, insurance, takaful and investment services.
 
The ratings are underpinned by Maybank’s sizeable core commercial banking franchise in its home market, sound asset quality and capitalisation, as well as resilient earnings generation at the bank level. The ratings also considers the consolidated credit profile of Maybank and its subsidiaries given the franchise inter-linkages between entities in the group and potential capital support that could be required from the operating financial holding company. The consistency of earnings and diversification of revenues and risks as well as Maybank’s strong consolidated operating performance and capitalisation continues to support Maybank’s ratings.

The ratings exclude specific uplift for potential systemic support although MARC opines that there is an extremely high likelihood that support would be forthcoming in the event of need given Maybank’s size and systemic importance as Malaysia’s largest financial services group.

At the bank-level, loan growth slowed to a more moderate 10.0% in 2012 after brisk year-on-year credit growth of 20.5% for 2011. This came mainly from loans to individuals and domestic business entities. MARC notes that Maybank’s domestic loans growth continues to be ahead of the industry and that of its peers and believes that the slower pace of lending should reduce risks to asset quality for the bank. The rating agency is also mindful that the domestic banking sector continues to be challenged by margin compression and competition. Working capital loans, the largest component of the bank’s loan book at slightly over a third of total loans grew only 0.7% in 2012 (2011: 23.7%). At the group-level, the domestic loan portfolio accounted for 63.3% of Maybank’s gross loans and is well-balanced between the consumer and non-consumer segments.

Maybank’s bank-level past due loans rose to RM11.64 billion or 5.31% of total gross loans at the end of 2012 (end-December 2011: RM10.80 billion). The inflow of newly impaired loans appears to have slowed for the 12 months ended December 31, 2012; this came to RM2.65 billion for the full year compared to RM1.65 billion for the six months ended December 31, 2011. Reclassifications of impaired loans to non-impaired, write-offs and recoveries of RM1.51 billion, RM1.53 billion and RM1.69 billion respectively during 2012 helped to contain the bank’s gross impaired loans ratio at 1.9% at the end of 2012. While MARC does not rule out the possibility of the past due loans becoming impaired and higher impaired loans as its new loans season, the rating agency believes that the deterioration in the bank’s asset quality should remain very manageable. The bank’s loan loss reserves fully cover its impaired loans as at end 2012; its loan loss reserve ratio was 106.8% compared to 83.3% a year ago.

MARC continues to regard the resilience of the bank’s revenue generation as good in light of its established franchise. At the same time, the rating agency notes that the bank is facing net interest margin compression and some pressure on its cost base as a result of rising personnel costs which it has managed to offset with faster income growth. Credit costs, meanwhile, remained manageable. The bank took up loan impairment allowances of RM268.8 million in its income statement for the full year 2012 compared to RM166.1 million for the six months to December 31, 2011. Maybank’s strong deposit franchise helped to temper the effect of competitive pressures in the domestic loan and deposit markets on its net interest margin. Its success in growing core deposits and deploying the deposits into loans has allowed the bank to bolster net interest income growth. At the group level, operating performance remained healthy with operating profit growing by 15.0% to RM7,742.1 million (corresponding 12 month period in 2011: RM6,735.1 million).

Maybank’s domestic leadership position in retail current accounts and savings accounts (CASA), and fixed deposits continues to benefit its funding and liquidity profile. The bank’s leading position in the domestic deposits market is supported by its extensive branch and ATM network coverage, the largest network among Malaysian banks. Maybank funds its loan book mostly with customer deposits, as reflected in its high gross loans-to-deposit ratio (LDR) of 92.4%. The bank’s granular and stable retail deposit continues to underpin the stability of its funding. MARC also expects the bank to retain good access to capital markets.

Maybank’s capital position was strengthened by a private placement of shares of RM3.66 billion in 2012. The equity private placement was aimed at bolstering the bank’s equity capital ahead of the implementation of the Basel III capital framework and to support the group’s growth objectives. The bank’s risk-weighted capital ratio (RWCR) improved to 16.27% as at end-December 2012 from 14.73% as at end-December 2011 net of proposed dividend, and assuming shareholders opt to receive their dividends in cash under the bank’s dividend reinvestment scheme. The bank’s improved capital position reflects its high reinvestment rate of 88.2% for the bank’s fifth dividend reinvestment plan (DRP). The expected continuation of the DRP by Maybank augurs well for the bank in maintaining its sound capital position. At the group level, Maybank’s capital position remained strong with RWCR at 16.6% as of end of 2012.

The ratings will be influenced by Maybank’s ability to manage the risks associated with its continued expansion overseas and preserve its financial metrics while pursuing its growth strategy. The outlook also incorporates the prospect of continuing substantial competitive challenge in its home market and the risks associated with the group’s continued strong growth appetite. A significant acceleration in overseas activities in higher risk markets could impinge on the Group-level risk profile. This could arise as a consequence of Maybank’s strategic objectives of becoming a leading ASEAN wholesale bank and a regional financial services group that derives 40% (2012: 30%) of group pre-tax profit from international operations by 2015.

Contacts:
Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my;
Se Tho Mun Yi, +603-2082 2263/ munyi@marc.com.my