CREDIT ANALYSIS REPORT

BANK MUAMALAT MALAYSIA BERHAD - 2020

Report ID 605356 Popularity 123 views 12 downloads 
Report Date Dec 2020 Product  
Company / Issuer Bank Muamalat Malaysia Bhd Sector Finance - Financial Institution
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Rationale
MARC has affirmed its financial institution (FI) ratings of A/MARC-1 on Bank Muamalat Malaysia Berhad (Bank Muamalat) and AIS rating on the bank’s Islamic Senior Notes Programme (Senior Sukuk) of up to RM2.0 billion. The ratings outlook is stable. The FI ratings reflect Bank Muamalat’s relatively modest size, strong capitalisation, moderate financial performance and weakening asset quality metrics.

Bank Muamalat provides a full range of Islamic financial services through its 67 branches nationwide. The bank registered a 6.2% growth y-o-y in financing portfolio in 1H2020, lower than the Islamic banking industry average growth of 8.2% for the same period. Its market share in the domestic Islamic banking industry’s gross financing and total deposits segments stood at a modest 2.6% and 3.2% as at end-1H2020. The bank remains hampered by a lack of economies of scale in contrast to its domestic bank-backed peers that are able to share infrastructure and resources with their parent banks. Consumer banking, consisting mainly of housing and personal financing, remains a key component of the bank’s financing portfolio. This amounted to 64.5% of the bank’s total financing of RM16.5 billion as at end-June 2020 (FY2019: 64.0%; RM16.0 billion) and contributed half of the bank’s total revenue.

During the period, the bank’s asset quality weakened with the gross impaired financing (GIF) ratio increasing to 1.46% from 1.31% at end-2019 (Islamic banking industry average for 1H2020: 1.32%). The increase was mainly attributed to weakness in the manufacturing segment. Its financing loss coverage ratio stood at 76.1%. MARC is of the view the bank’s asset quality will come under further pressure from the impact of the COVID-19 pandemic. Its strong capitalisation levels provide some mitigation against asset quality weakness; Tier 1 and total capital ratios stood at 15.4% and 18.0% (industry average: 14.0%; 18.3%). Additionally, the bank would be able to utilise its existing Basel III-compliant Subordinated Sukuk programme to support its capital position when required; a total of RM250 million has been issued as at end-September 2020.

In 1H2020, Bank Muamalat’s pre-tax profit fell 76.5% y-o-y to RM28.6 million, mainly on the back of lower income from financing due to deferred payments during the moratorium period. Additionally, the bank made a provision of RM23.7 million as a pre-emptive measure in view of the potential weakening of its asset quality due to the impact from the COVID-19 pandemic. For 2020, the bank’s performance will be affected by the modification loss for the six-month moratorium period of RM46.2 million in addition to lower financing income following substantial reduction in the overnight policy rate (OPR) during the year. The stable outlook reflects MARC’s expectation that the bank’s performance and asset quality will be able to weather the current challenging economic conditions.

Major Rating Factors

Strength
Strong capitalisation ratios.

Challenges/Risks
Pressure on asset quality and earnings; and
Intense competition in the domestic Islamic banking industry.

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