MARC has affirmed its AAA financial institution (FI) rating on Bank Pembangunan Malaysia Berhad (Bank Pembangunan). Concurrently, the rating agency affirmed its MARC-1_IS/MARC-1 programme ratings on the bank’s Islamic/Conventional Commercial Papers (CP) Programme of up to RM2.0 billion. The ratings carry a stable outlook.

The affirmed FI rating is based on MARC’s assessment of high government support for Bank Pembangunan, given the bank’s status as a wholly government-owned development financial institution (DFI) and the bank’s role in supporting domestic economic development activities by extending loans and financial support to specific industries promoted by the government. The assessment is backed by strong historic evidence of governmental support extended to Bank Pembangunan by way of guarantees on borrowings as well as compensations for loss of interest income and credit loss on certain government-directed loans.

Bank Pembangunan’s asset quality has weakened, mainly linked to loans extended to the oil and gas, and technology sectors. Gross impaired ratio stood at 11.3% as at end-2015 (2014: 10.9%), mainly due to a lower loan base following large loan repayments and prepayments in 2015. The bank also undertook a substantial write-off amounting to RM711.7 million in 2015 (2014: RM140.8 million), leading to an overall decline in gross impaired loans to RM2.80 billion (2014: RM2.95 billion). Bank Pembangunan is also likely to divest its loss-making subsidiaries over the near term in an effort to further strengthen its balance sheet. In addition, the bank has tightened its lending criteria to mainly focus on government-initiated projects. The tighter screening process has contributed to the loan book contracting by 8.2% in 2015 from a growth of 2.8% in 2014, although the bank aims to grow its loan book by 2% - 3% in 2016.

As a DFI, the bank’s loan exposures are primarily in the infrastructure sector, which accounted for 86.3% of total loans in 2015, with transportation being the largest sub-sector. This gives rise to loan concentration risk; given its focus on long-tenure and large-ticket infrastructure loans, the bank is also exposed to single borrower concentration risk. Nonetheless, MARC draws comfort from the fact that the majority of these loans are related to government-initiated projects which benefit from direct or indirect government support. This is reflected by the lower gross impaired loans ratio of the infrastructure portfolio of 5.4% as at end-2015 compared to the technology, oil and gas, and maritime sectors’ ratio of 45.5%, 41.6% and 48.1%, although these sectors accounted for only 5.9%, 5.3% and 2.5% of the bank’s total outstanding gross loans respectively.

Bank Pembangunan’s capitalisation remains strong as reflected by its Basel I risk-weighted capital ratio of 38.6% as at end-2015 (2014: 33.1%), of which its core capitalisation (share capital and reserves) accounted for a significant 88.9% of the total capital base. While the bank’s capital position has been supported by internal capital generation, profitability has been dragged by credit costs and impairments, particularly on its shipping subsidiary in recent years. Although net profit increased to RM117.7 million in 2015 (2014: RM93.5 million), the bank’s return on assets remained low at 0.42% in 2015. MARC views that the bank’s profitability could be affected by further asset quality weakening in light of the challenging economic conditions.

Bank Pembangunan retains funding support from the government as indicated by its funding composition comprising deposits from the government and its related entities. Additionally, government-guaranteed borrowings have remained a key source although this declined to 38.8% of the bank’s total funding as at end-2015 (2014: 65.5%). MARC notes that to allay funding costs, the bank has shifted to cheaper customer deposits whose proportion to total funding has increased to 41.4% as at end-2015 (2014: 26.8%); nonetheless, the increased reliance on such deposits could result in potential funding volatility. This notwithstanding, the bank’s top 20 largest depositors, which form the bulk of total customer deposits, have been relatively stable in the past.

The stable outlook reflects MARC’s expectations that government support for Bank Pembangunan will remain strong. Downward rating pressure could be triggered if government support assumptions weaken and/or Bank Pembangunan’s financial metrics deteriorate sharply.

Contacts:
Joan Leong, +603-2082 2270/ joan@marc.com.my;
Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.