Public Bank has built a superior record in prudent underwriting and good risk controls in the past decade.
KUALA LUMPUR: S&P Global Ratings has revised its assessment of Public Bank’s stand-alone credit profile higher at 'a', from 'a-' previously, based on its strong risk management capabilities.
It said on Thursday the banking group’s superior and sustained track record in prudent underwriting and good risk control makes it stand out from regional peers.
“Public Bank has built a superior record in prudent underwriting and good risk controls in the past decade. Its credit costs have been on a downward trajectory since 2009, reaching as low as 7 basis points (bps) in 2017.
“The annualised credit costs for first-half 2018 remained at 6 bps even after the implementation of Malaysian Financial Reporting Standards (MFRS) 9 on Jan. 1, 2018.
“Public Bank's credit costs contrast with the 20 bps peer average of other banks that we rate in the country. Even from a regional perspective, we believe the bank stands out with its better risk management performance when benchmarked with leading players from more advanced markets such as Singapore and Hong Kong. We therefore assess Public Bank's stand-alone credit profile
(SACP) higher at 'a' from 'a-' previously,” it said.
S&P Global Ratings pointed out the bank's strong risk management capabilities have not come at the cost to profitability and operational efficiency.
Public Bank has been growing its loan book (90% concentrated in Malaysia) faster than the industry average in the past, before slowing down to 3.6% (versus the industry average of 5.0%) in 2017 amid a generally lacklustre economic environment.
The rating agency said the bank’s adjusted return on assets at 1.42% and return on equity at 14.6% have also been notably higher than peers' in first-half 2018 (annualised), while its cost-to-income ratio at 33% is much lower than the industry average of 45%-50%.
It attributed the bank’s outperformance to its focus and expertise on the profitable niche market of mass affluent, retail, and small and midsize enterprise segments in Malaysia, which helps it to build good customer loyalty and deposit stickiness at the same time.
“The stable management team and prudent company strategy also help to contain the exposure to risky segments that affect other banks.
“We forecast Public Bank's credit growth at 6%-9% and its risk-adjusted capital (RAC) ratio at about 10% for the next two years. We believe it will be difficult for the bank to sustain its RAC ratio above 10% after it normalises its loan growth or increases its dividend payout ratio.
“Our strong risk assessment on Public Bank has already incorporated its improving capital base, which will be sufficient to cover unexpected losses. We also expect the bank to maintain its established market position and strong funding and liquidity profile in our forecast period.
“The improvement of the bank SACP to 'a' from 'a-' has no impact on the 'A-/A-2' issuer credit ratings on Public Bank. This is because we do not rate Public Bank above the foreign currency sovereign credit rating on Malaysia (foreign currency A-/Stable/A-2; local currency A/Stable/A-1), since the bank operates predominantly in Malaysia and we do not expect it to be able to withstand stress associated with a sovereign default.
“Although we view the bank as having high systemic importance in the country, and assess the government as highly supportive, our current rating reflects no government support because it is on par with the sovereign rating,” said S&P Global Ratings.
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