CREDIT ANALYSIS REPORT

BANK MUAMALAT MALAYSIA BERHAD - 2015

Report ID 5119 Popularity 958 views 2 downloads 
Report Date Oct 2015 Product  
Company / Issuer Bank Muamalat Malaysia Bhd Sector Finance - Financial Institution
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Rationale

MARC has affirmed financial institution (FI) ratings of A / MARC-1 to Bank Muamalat Malaysia Berhad (Bank Muamalat) and concurrently affirmed the AIS rating on the Islamic Senior Notes Programme (Senior Sukuk) of up to RM2.0 billion. The outlook on the ratings is stable. MARC notes that Bank Muamalat and Malaysia Building Society Berhad (MBSB) have received an approval from Bank Negara Malaysia (BNM) to commence merger negotiations on September 30, 2015. There is no immediate rating impact as the merger plan is still preliminary at this juncture. However, MARC will monitor the proposed merger plans and will assess the rating implication when there is more clarity.

The affirmed FI rating is driven by Bank Muamalat’s relatively small asset size, moderate financial performance, weakening asset quality metrics and high reliance on wholesale funding. The bank has a modest market share of 3.7% and 4.5% of the domestic Islamic banking sector’s gross financing and total deposits segments respectively as at end-March 2015 (FY2015). As a non-bank backed Islamic bank, Bank Muamalat does not have the benefit of sharing infrastructure and resources that are common to its larger bank-backed peers. The lack of economies of scale, with branch network of 60 branches, has impeded its growth. For FY2015, financing growth declined to 12.6% y-o-y from 14.5% in FY2014. (Islamic banking industry average of 19.8% as at end-2014.) Bank Muamalat’s financing portfolio, however, largely mirrors the composition of the domestic Islamic banking industry with key exposures to the residential and consumption segments.

For FY2015, the bank’s financing growth was supported by household financing, which offset the contractions in consumption credit and transport vehicles financing. Business segment financing, particularly in trades, transportation and agriculture, generally trended upwards during the period. During 1QFY2016, financings grew slower at an annualised 9.6% which was mainly driven by household financings. MARC expects the bank’s financing growth to moderate going forward in line with the impact from tighter lending guidelines by BNM and the moderating economy. Bank Muamalat’s asset quality remains comparatively weaker than its peers; its gross non-performing loans weakened further to 2.8% as at end-June 2015 from 2.7% in end-June 2014. The bank’s financing-loss-coverage ratio declined to 77.2% as at end-June 2015 (end-June 2014: 93.1%), which is sharply lower than the industry average of 97.5%.

Asset quality concerns are somewhat moderated by Bank Muamalat’s strong capital position with Tier 1 and total capital ratio (CAR) standing at 13.0% and 15.6% respectively as at end-June 2015 (end-March 2014: 14.2%; 17.6%). The bank’s capital ratios, which remain higher than industry average levels, provide some buffer against moderate increase in impairment levels. The decline in capital ratios in FY2015 from the preceding year is largely attributed to higher increase in risk-weighted assets (RWA) to RM14.1 billion (FY2014: RM12.2 billion), which offset the 2.5% increase in capital base to RM2,192.4 billion (FY2014: RM2,137.1 billion). MARC notes that the bank is setting up a Basel III-compliant Subordinated Sukuk to mitigate the ongoing phasing out of the non-Basel III-compliant Subordinated Sukuk which accounted for 13% of its total capital base as at end-June 2015.

Customer deposits rose by 10.9% y-o-y, resulting in the bank’s financing-to-deposit ratio increasing to 70.1% as at end-FY2015 (FY2014: 69.1%). The customer deposit growth was mainly driven by wholesale funding particularly deposits from government and statutory bodies. Bank Muamalat’s net financing income grew marginally to RM448.5 million in FY2015 but non-financing income declined sharply by 20.0% y-o-y to RM77.9 million due mainly to unrealised losses on derivatives. In the same period, the bank’s pre-tax pre-provision slightly increased by 1.3% y-o-y to RM152.2 million (FY2014: RM150.2 million) but pre-tax profit declined by 44.4% y-o-y to RM114.3 million owing mainly to higher net impairment charges of RM16.7 million compared to impairment write-backs of about RM66.8 million recorded in the previous corresponding period. Accordingly, the bank’s post-tax return on assets and equity measures weakened to 0.53% and 6.23% respectively (2014: 0.73%; 8.96%). In 1QFY2016, pre-tax profit declined further by 31.5% y-o-y to RM36.0 million (1QFY2015: RM52.5 million) due to a net increase in allowance for impairments.


Major Rating Factors

Strengths

  • Adequate capital position; and
  • Improved risk management.

Challenges/Risks

  • Strengthening presence in the domestic banking sector; and
  • Intense competition in the domestic banking industry.
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