MARC has affirmed its AAA/MARC-1 financial institution (FI) ratings on Maybank Islamic Berhad (Maybank Islamic) and AA+IS rating on Maybank Islamic’s RM1.0 billion Islamic Subordinated Sukuk (Subordinated Sukuk). The rating outlook is stable. The Subordinated Sukuk qualifies as Tier-2 capital and is rated one notch lower than the bank’s FI rating in accordance with MARC’s notching policy for subordinated debt issued by a AAA-rated bank.

MARC has equalised the FI ratings of Maybank Islamic with that of its parent Malayan Banking Berhad (Maybank) on the basis of the bank’s importance as Maybank group's Islamic banking arm, its contribution to Maybank group’s profitability as well as the operational integration and shared branding between them. The ratings also consider the high likelihood of full financial and timely support from its parent and the bank’s strengths in domestic Islamic banking industry, including its position as the largest domestic Islamic bank and its adherence to sound capitalisation policy. These positive factors notwithstanding, the bank continues to face margin compression amid a keenly competitive banking environment and potential asset quality weakness arising from the rapid pace of financing growth in recent years. 

Maybank Islamic has strengthened its position as the largest Islamic bank in Malaysia, with an increased share in the Islamic banking sector’s gross financing and total deposits to 30.6% and 23.8% respectively as at end-December 2013 (end-December 2012: 26.2%; 23.2%). The strong market position stems primarily from the bank’s ability to leverage on Maybank’s well-established brand name, infrastructure and distribution network comprising 427 Maybank branches and 343 specialised centres nationwide as at end-April 2014. Maybank Islamic has benefited from the rapid growth of domestic Islamic banking relative to conventional banking. Maybank Islamic's gross financing and advances portfolio grew by 40.1% (2012: 18.4%) as compared to the domestic Islamic banking industry’s average growth rate of 20.0% in 2013.  In the same period, deposits increased by 17.0% (2012: 20.8%), driven by growth in its term deposits.  

MARC also observes that Maybank Islamic’s gross impaired financing ratio stood at 0.60% as at end-2013 (end-2012: 0.84%), which is well below the industry’s average gross impaired financing ratio of 1.4%. The  decline was due partly to a larger financing base, although gross impaired financing outstanding was also relatively unchanged at RM520.8 million as at end-2013 (end-2012: RM520.0 million). The bank registered lower new impairments of RM533.3 million (2012: RM543.3 million) while amounts reclassified as non-impaired, recovered and written-off were also lower at RM537.4 million in 2013 (2012: RM860.3 million). Nonetheless, MARC notes with concern that the bank’s past due but not impaired financings rose by 10.0% to RM7.2 billion (2012: RM6.5 billion) which could be exacerbated in a rising interest rate environment.  This concern is somewhat mitigated by Maybank Islamic’s strong financing loss coverage ratio of 142.8% as at end-2013.

Maybank Islamic’s pre-tax pre-provision profit increased by 20.0% to RM1,394.4 million (2012: RM1,162.5 million), attributed to the strong growth in the bank’s financing portfolio. However, the bank’s return on assets and equity measures for 2013 remained relatively unchanged at 0.97% and 19.1% respectively. MARC also observes the declining trend of Maybank Islamic’s net financing margin (NFM), which stood at 1.89% (2012: 1.91%), reflecting persistent pricing pressures and high funding costs within the Islamic banking industry. This has been partly offset by the increase in non-financing income, which rose by 17.1% to RM449.3 million (2012: RM383.8 million). The bank’s operational costs have increased as reflected by the cost-to-income ratio of 37.8% at end-2013 (2012: 35.0%), although the ratio remains among the lowest of its domestic peers.

The bank’s gross financing-to-deposit ratio increased sharply to 104.7% as at end-2013 (end-2012: 87.3%) as a result of strong financing growth. However, liquidity concerns are somewhat mitigated by Maybank Islamic’s ready access to funds from its parent Maybank via the restricted profit sharing investment account (RPSIA). The RPSIA increased significantly to RM8,336.3 million during 2013 (2012: RM685.0 million). Including the RPSIA amount, Maybank Islamic’s gross financing-to-deposit ratio stands at 95.1%. The bank’s liquidity position as at end-2013 was fairly stable with a liquid assets ratio of 20.3% while the proportion of CASA-to-total customer deposits declined marginally to 32.4% (end-2012: 33.1%). However, the more expensive term deposits remain the dominant component of the bank’s deposit base at 67.6% of total customer deposits. 

MARC notes that Maybank Islamic’s capital adequacy ratios for 2013 are in compliance with BNM’s Basel III capital standards: the Tier 1 capital adequacy ratio (Tier 1 CAR) and total capital adequacy ratio (total CAR) stood at 11.76% and 13.71% respectively (2012: 10.83%; 12.59%). The improvement is attributed to a larger capital base arising from increased retained earnings and issuance of new ordinary shares, which offset the growth in the bank’s risk-weighted assets following the increase in financing base. The new Basel III regulation to phase out Tier 2 subordinated sukuk instruments is not expected to materially impact the bank’s capital position as the bank is addressing the phasing out by issuing Basel III-compliant instruments. With Common Equity Tier 1 (CET1) of 11.76%, which is well above the minimum total CAR regulatory requirement of 8.00%, MARC expects the bank’s capital position to remain sound, supported by its substantial core capital composition and healthy capital generation.

The stable outlook on Maybank Islamic reflects MARC’s expectations that the bank will remain a core entity of the Maybank group and maintain a strong market position in the domestic Islamic banking industry. The outlook also incorporates the rating agency’s belief that Maybank will continue to sustain a sound financial profile in the banking sector.

Contacts:
Sonia Lim, +603-2082 2267/ sonia@marc.com.my;
Se Tho Mun Yi, +603-2082 2263/ munyi@marc.com.my;
Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.