Friday, Sep 04, 2015

MARC has affirmed its AAA financial institution rating on Bank Pembangunan Malaysia Berhad (Bank Pembangunan) and MARC-1ID / MARC-1 programme ratings on the bank’s Islamic and/or Conventional Commercial Papers (CP) Programme of up to RM2.0 billion with a stable outlook.

The ratings are premised on the high support uplift from the Malaysian government to Bank Pembangunan’s standalone credit strength based on MARC’s government-related entities (GRE) rating methodology, under which Bank Pembangunan has a government support assessment score of GS2. The assessment considers Bank Pembangunan’s status as a wholly government-owned development financial institution (DFI) which was formed to support the country’s economic development activities by providing loans and financing to specific sectors. The government’s support for the DFI remains evident in the guarantees provided to lenders for extending funding to the bank, in compensating loss of interest income on directed loans, and in providing support funds to offset credit losses on some of the loans. The ratings also incorporate the bank’s strong capitalisation and satisfactory funding and liquidity profile. These factors notwithstanding, Bank Pembangunan’s standalone credit profile has been weighed down by weaker asset quality metrics and a decline in profitability.

MARC notes that Bank Pembangunan’s loans to the infrastructure sector continue to account for the bulk of the bank’s loan exposure (82.7% of total loans as at end-2014) with the transportation subsector being the largest. The performance of the infrastructure portfolio has remained relatively steady; its other loan portfolios namely maritime, oil and gas, and technology have been hit by the rapid slowdown in their respective sectors. The bank’s gross impaired ratio increased to 10.9% (2013: 9.7%) as total new impairments rose to RM771.3 million (2013: RM471.6 million), resulting in the loan loss reserve ratio declining to 86.2% (2013: 93.4%) despite higher total allowances of RM2.5 billion (2013: RM2.4 billion).

The rating agency observes the asset quality of the infrastructure portfolio with an impaired ratio of 4.5% remains strong relative to the maritime (52.0%), technology (48.8%) and oil and gas (24.8%) portfolios as at end-2014. MARC views that the bank’s asset quality could come under further pressure over the near term, although the bank has taken pre-emptive measures to contain its asset quality deterioration. Among these is to reduce exposure to problematic sectors as reflected by the moderate gross loan growth of 2.8% in 2014 (2013: 4.4%). MARC views that the bank’s overall loan growth will continue to remain subdued, given the challenging economic environment that could potentially lead to delays in the implementation of infrastructure projects. Bank Pembangunan has also shifted emphasis to Islamic financing with a target to increase the proportion of Islamic financing to 30% of its total gross loans by 2017 (2014: 25.7%).

Net interest income rose by 6.6% y-o-y to RM856.5 million in 2014 (2013: RM803.2 million) on an enlarged loan base and improved net interest margin (NIM) following an increase in the policy rate. However, net profit fell substantially to RM93.5 million in 2014 (2013: RM396.1 million) due mainly to the significantly higher impairments on the bank’s shipping subsidiary (2014: RM301.9 million; 2013: RM29.6 million) and credit costs (2014: RM270.0 million; 2013: RM107.5 million). Bank Pembangunan’s capitalisation remains strong with core and risk-weighted capital ratio of 30.5% and 33.1% respectively as at end-2014 (2013: 30.5%, 32.4%). Core capitalisation remains strong with Tier 1 capital, which comprises share capital and reserves, accounting for about 92.2% of the total capital base. MARC views that the bank’s current capitalisation levels would continue to provide some buffer to withstand asset quality deterioration to some extent.

Bank Pembangunan continues to rely on borrowings as a key funding source. Of its total borrowings of RM15.2 billion as at end-2014, RM13.9 billion or 91.4% was supported by federal government guarantees. However, government-guaranteed borrowings will reduce significantly after the expected repayment of RM6.3 billion by end-2015, following which non-government guaranteed borrowings would become an important and regular feature of its funding profile. While government-guaranteed borrowings would still account for a sizeable 53.5% of total borrowings following the repayment, MARC opines that the bank’s funding costs would increase going forward. The bank’s other funding sources include deposits from customers and concessional funding.

The stable outlook reflects MARC’s expectations that the government will continue to extend timely support to Bank Pembangunan to enable it to carry out its financing activities. Downward rating pressures could be triggered if this support is seen to be not forthcoming and/or the financial metrics of Bank Pembangunan worsens.

Joan Leong, +603-2082 2270/;
Sharidan Salleh, +603-2082 2254/