[RAM] RAM Ratings reaffirms OCBC Malaysia's AAA rating

RAM Ratings has reaffirmed OCBC Bank (Malaysia) Berhad’s (OCBC Malaysia or the Bank) AAA/Stable/P1 financial institution ratings. The reaffirmation is premised on our expectation of ready parental support from Oversea-Chinese Banking Corporation Limited (OCBC Ltd), if required, in view of the Bank’s strategic importance to the latter. OCBC Malaysia’s asset quality remains weaker than similarly rated peers’, with the recent rise in Covid-19 infections and an extended lockdown compounding downside risk. The Bank’s loss absorption buffers however should provide enough headroom to withstand potentially greater impairments.

Asset quality was weaker than expected, with the Bank’s gross impaired loan (GIL) ratio surging to 3.3% as at end-March 2021 from 2.0% as at end-December 2019. Deterioration mainly stemmed from a handful of lumpy corporate impairments. We also observed weakness in the Bank’s retail book despite ongoing relief measures. The proportion of Stage 2 loans was sizeable at 20.3% as at end-March 2021, partly owing to the pre-emptive downgrade of most retail loans under repayment assistance. Considering the Bank’s increasing susceptibility to lumpy corporate impairments, we remain wary of further defaults, particularly those from vulnerable segments amid the pandemic. 

Heftier actual impairment charges, management overlay and an adjustment of macroeconomic variables in its provisioning model caused OCBC Malaysia’s credit cost ratio to jump to 97 bps in FY Dec 2021 (FY Dec 2019: 31 bps). However, the writeback of provisions for non-credit-impaired loans owing to the better economic outlook saw its annualised credit cost ratio coming in at just 2 bps in 1Q FY Dec 2021. As a result of an enlarged impaired loan base, GIL coverage (including regulatory reserves) was a lower but still healthy 93% as at end-March 2021 (end-December 2019: 112%). Capitalisation stayed strong, the Bank’s common equity tier-1 capital ratio standing at 15.3% as at the same date, which fortifies the buffer against heightened credit risk. 

Around half of OCBC Malaysia’s pre-provision profit in FY Dec 2020 was erased by heftier provisioning expenses. This left the Bank with a substantially lower pre-tax profit of RM0.7 bil (FY Dec 2019: RM1.2 bil), translating into a return on risk weighted assets of 1.5%. The provision writeback and trimmed operating expenses lifted its pre-tax profit to RM0.4 bil in 1Q FY Dec 2021 (1Q FY Dec 2020: RM0.2 bil). Notwithstanding successive rate cuts last year, the Bank’s net interest margin widened marginally to 2.1% in FY Dec 2020 and 1Q FY Dec 2021 on an annualised basis (FY Dec 2019: 2.0%), thanks to the prioritisation of current and savings account deposits over fixed deposits. Ongoing deposit repricing bodes well for the Bank’s profit performance this year, although potentially still-elevated provisioning expenses amid the prolonged lockdown constrain earnings. 

OCBC Malaysia’s healthy funding and liquidity profile is underscored by high proportions of current and savings account deposits (CASA) as well as individual deposits, which accounted for a respective 48% and 52% of customer deposits as at end-March 2021 (industry: 32% and 38%). During the 15-month period up to end-March 2021, CASA deposits grew 23% while fixed deposits contracted by 12%, in line with industry trends. The Bank’s liquidity coverage ratio and net stable funding ratio remained above 100% as at the same date.


Analytical contacts
Tan Shu Xuan
(603) 3385 2497
shuxuan@ram.com.my

Sophia Lee
(603) 3385 2619
sophia@ram.com.my