CREDIT ANALYSIS REPORT

Bank Muamalat Malaysia Bhd - 2014

Report ID 4854 Popularity 1181 views 37 downloads 
Report Date Sep 2014 Product  
Company / Issuer Bank Muamalat Malaysia Bhd Sector Finance - Financial Institution
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Rationale

MARC has assigned financial institution ratings of A / MARC-1 to Bank Muamalat Malaysia Berhad (Bank Muamalat) and concurrently assigned a rating of AIS on the Islamic Senior Notes Programme (Senior Sukuk) of up to RM2.0 billion. The outlook on the ratings is stable.  The rating on Bank Muamalat’s Senior Sukuk issuance is equalised to the bank’s financial institution rating based on the seniority of the sukuk. The ratings incorporate the bank’s modest asset size, adequate capital position and moderate financial performance as well as its relatively high gross impaired ratio and high reliance on wholesale funding.

As one of the earliest Islamic banks established in Malaysia, Bank Muamalat provides a full range of Islamic financial services through its 59 branches nationwide. Notwithstanding its long operating track record, the bank has a relatively modest presence in the Islamic domestic banking sector as reflected by its market share of 4.2% and 5.0% of the domestic Islamic banking sector’s gross financing and total deposits segments respectively as at end-March 2014. MARC observes that the bank’s annual financing growth, which ranged between 8% and 15% in the last five years, has mostly been lower than the Islamic banking industry’s growth of above 20% per year during the same period. Bank Muamalat has an asset size of RM20.1 billion as at end-March 2014 with consumer banking accounting for 67.1% of the bank’s financing assets.

MARC notes that although Bank Muamalat’s gross impaired financing ratio remains higher than the Islamic banking industry average of 1.4%, the ratio had exhibited an improving trend. However, for the financial year ended March 31, 2014 (FY2014), the gross impaired financing ratio increased to 2.7% from 2.5% as at end-FY2013. MARC understands that four impaired corporate accounts accounted for a substantial portion of the impairment growth. The bank’s financing loss coverage reversed an improving trend in the last five years by registering 83.3% as at end-March 2014, which was also considerably lower than the Islamic banking industry’s average level of 116.5%. 

Bank Muamalat’s Tier 1 capital ratio (Tier 1 CAR) of 14.15% and total capital ratio (total CAR) of 17.56% as at end-March 2014 (Islamic banking average: 12.6%; 14.8%) were supported by retention of income, issuance of new ordinary shares and Tier II subordinated debts as well as lower financing growth.  MARC notes that during FY2014, the bank declared total dividends of RM195 million which were reinvested via issuance of new shares.

Given that Bank Muamalat’s wholesale funding accounts for about 48% of the bank’s total customer deposits, the bank is exposed to funding volatility. Individual deposits currently constitute only 9% of customer deposits, although this has increased from about 6% four years ago. However, the bank’s financing-to-deposit ratio is healthy at 69.1% as at end-March 2014. 

Despite intense competition in the domestic Islamic banking industry, the net financing margin remained fairly stable at 2.3% in FY2014 (FY2013: 2.4%), largely attributed to the higher composition of consumption financing which commands higher profit rates. While Bank Muamalat has exhibited a satisfactory profit track record since FY2010 amid improving gross impaired financing levels and some write-backs (FY2014: RM55.3 million; FY2013: RM12.6 million), the bank’s pre-tax pre-provision profits decreased by 32.5% y-o-y to RM150.2 million (FY2013: RM222.4 million), mainly due to higher funding and operating costs. The bank’s cost-to-income ratio increased to 70.5% (FY2013: at 58.9%). As a result, returns on asset and equity measures declined sharply to 0.7% and 9.0% respectively (FY2013: 0.80%; 11.16%).

The stable outlook reflects MARC’s expectations that the bank’s asset quality and profitability measures will remain commensurate with the current rating. The outlook also assumes a favourable economic environment that should help sustain the bank’s asset quality.

Major Rating Factors

Strengths

  • Adequate capital position;
  • Improved risk management; and
  • Niche market in consumption credit.

Challenges

  • Small presence in domestic banking sector;
  • Intense competition in the domestic banking industry; and
  • Higher reliance on wholesale funding.
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