[RAM] RAM Ratings assigns AA2(s) rating to Bank Rakyat's proposed RM10 billion Sukuk Wakalah, reaffirms existing ratings

RAM Ratings has assigned an AA2(s)/Stable rating to Bank Kerjasama Rakyat Malaysia Berhad’s (Bank Rakyat or the Bank) proposed RM10 bil Sukuk Wakalah Programme (2020/2050), issued through its funding conduit, Imtiaz Sukuk II Berhad. Concurrently, the Bank’s financial institution ratings (FIRs) of AA2/Stable/P1 and the ratings of its RM9 bil Islamic MTN and Islamic CP Programme (2013/2023) and RM5 bil Subordinated Sukuk Murabahah Programme (2016/2036), also issued under funding conduits, have been reaffirmed.

The FIRs reflect Bank Rakyat’s strong foothold in personal financing (PF) and its robust loss absorption capacity. While we expect slippage in asset quality as the Bank weathers upcoming challenges brought about by a slowing economy following the Covid-19 pandemic, its sturdy capitalisation is expected to continue to provide a strong buffer against potential credit impairments. As at end-December 2019, the Bank’s Basel I tier-1 capital and total capital ratios came in at a respective 22.1% and 23.6%. The ratings also incorporate our expectation of ready government support if required, given the Bank’s status as a cooperative bank-cum-developmental financial institution.

Bank Rakyat boasts the largest share of the highly competitive and lucrative Malaysian PF market, extending financing mostly to civil servants. As PF makes up 76% of its total financing, the Bank’s fortunes closely track the performance of this portfolio. Bank Rakyat’s asset quality is assisted by the PF segment, which mostly enjoys repayments via non-discretionary salary deductions. In view of the concentration in PF, the Bank’s long-term strategy is to reduce its PF portfolio by growing other types of consumer and non-household lending. While we recognise the benefits of diversification, we remain cautious of an expansion away from Bank Rakyat’s core expertise as its non-PF segments have traditionally exhibited weaker asset quality.

Bank Rakyat’s gross impaired financing (GIF) ratio had improved marginally to 2.0% as at end-March 2020 (end-December 2018: 2.1%) while total provisioning coverage (including regulatory reserves) was a healthy 126% (end-December 2018: 116%). Considering challenging economic conditions ahead, the Bank is expected to see weaker asset quality, particularly in non-salary deducted PF, mortgage financing extended to the B40 income segment, as well as business and cooperative financing. Most of the financing that qualifies for the 6-month moratorium on repayments have not opted out of the relief measure. Nonetheless, overall asset quality is anticipated to be manageable, underpinned by salary-deducted PF.

In fiscal 2019, Bank Rakyat’s net financing margin (NFM) stayed at 3.0% while pre-tax profit dipped slightly to RM1.79 bil. Moving forward, profitability is seen to be weighed down by higher impairment and modification charges as well as pressure on the Bank’s NFM, considering the sharp drop in the overnight policy rate (OPR). Although the Bank continues to grow the proportions of individual and current account and savings account deposits, they remain relatively small, accounting for a respective 21% and 8% of total deposits.

On 26 June 2020, three individual shareholders filed legal action in the High Court seeking a judicial review to abolish Bank Kerjasama Rakyat Malaysia Berhad (Special Provisions) Act 1978 (Act 202). Act 202 was established in 1978, giving the Government special powers to ensure proper management of the Bank, in conjunction with a loan extended to it by the Government to prevent its insolvency. Termination of Act 202 may affect our assessment of government support. That said, we highlight that Bank Rakyat will remain under the supervision and regulation of Bank Negara Malaysia regardless of the outcome of the judicial review. As the legal proceedings are still preliminary and likely to be protracted, RAM will reassess the potential impact on the ratings when more information is made available.