KUALA LUMPUR: Japan Credit Rating Agency, Ltd (JCR) has affirmed its A ratings on Malayan Banking Bhd with a stable outlook to reflect its strong business base in Malaysia, diversification of its revenue sources, high earnings capacity.
The rating agency, in its statement issued on Friday, also pointed out to Maybank's sound liquidity position and high capital adequacy ratios.
“On the other hand, they are constrained by the sovereign rating on Malaysia (Foreign Currency Long-term Issuer Rating: A/Stable), ” it said.
JCR said this reflects the nature of the banking business, which is, in general, influenced by the regulatory environment and the economic and financial conditions of the location country.
“Maybank's asset quality and earnings have been under downward pressure from the deteriorating economic conditions as a result of the Covid-19 pandemic. However, JCR holds that its high earnings capacity will serve as sufficient buffers to absorb credit costs, ” it said
Maybank is the largest commercial bank in Malaysia with consolidated assets of RM872.2bil at the end of September 2020.
It is also engaged in non-banking operations such as securities and insurance through its subsidiaries with a broad business presence in the Asean region.
Maybank’s asset quality and earnings have been under downward pressure from the deteriorating economic conditions as a result of the Covid-19 pandemic.
However, JCR holds that its high earnings capacity will serve as sufficient buffers to absorb credit costs.
JCR said Maybank has a strong banking franchise in Malaysia with a broad customer base including individuals, SMEs, midsize and large companies. Its market shares for deposits and loans are about 18% at the end of 2019.
Maybank holds the country’s largest Islamic bank as a subsidiary, securing an advantageous position in Islamic finance, a rapidly growing market in the country.
Outside of Malaysia, it is one of the largest foreign Qualifying Full Banks in Singapore (which accounted for around 24% of the bank’s total loans at the end of 2019), where it has an established operating base for retail, commercial and corporate banking business. In Indonesia (which accounted for 7% of its total loans), Maybank holds a relatively large local bank.
In terms of non-banking operations, Maybank stands as one of the largest insurers in Malaysia through its subsidiary Etiqa.
Maybank also boasts a presence in the investment banking and securities business both in the domestic and overseas markets centering on the Asean region.
Through these networks, the bank secures a stable earnings base outside of Malaysia as well, while its earnings sources are also diversified among a wide range of businesses.
JCR pointed out that Maybank’s gross impaired loan (GIL) ratio had been on a rising trend since 2014 until 2019 due mainly to the deterioration of its overseas loan book. But as the bank has made progress in derisking its corporate loan portfolios in Singapore and Indonesia in recent years, the pace of new formation of impaired loans has slowed down.
The bank’s asset quality is maintained at a certain level with the GIL ratio declining to 2.35% at the end of September 2020.
During the first three quarters of 2020, new formation of impaired loans remained muted while some loans were written off and selected exposures were paired down.
The bank’s credit cost ratio in the same period rose to around 90bps, the highest in the last ten years. The increase in credit costs during this period is mainly attributed to management overlay for specific borrowers and forward-looking provisioning based on assumptions for macroeconomic variables.
JCR views that the bank has proactively topped up its provisions to be prepared for potential increase in credit risks.
“Given that the strict restrictive measures to contain the pandemic have already been lifted and economic activity has gradually resumed in the bank’s main countries of operation, JCR expects that credit costs will remain at a manageable level as compared with the bank’s earnings volume, ” it said.
JCR also pointed out Maybank maintains adequate capacity to absorb credit costs through earnings, with its return on asset based on pre-provisioning operating profit standing at the 1.6% in 2019.
This reflects the bank’s high profitability in its core lending operation, with its net interest margin standing at around 2.3% even amid intensive funding competition.
“Looking back at the medium-term trend of the bank’s financial performance up to 2019, its pre-provisioning operating profit had been on the increase driven by net interest income and income from Islamic banking operations amid the growth of loans, ” it said.
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