[RAM] RAM Ratings reaffirms SMBC Malaysia's AA1 rating

RAM Ratings has reaffirmed Sumitomo Mitsui Banking Corporation Malaysia Berhad’s (SMBC Malaysia or the Bank) AA1/Stable/P1 financial institution ratings. 

The reaffirmation is premised on our view that any asset quality deterioration amid lingering COVID-19 risks will be manageable as the Bank’s credit exposure is primarily to subsidiaries of Japanese multinational companies and large local corporates which are typically more resilient. We expect ready support from the Bank’s ultimate parent, Sumitomo Mitsui Financial Group, Inc. (SMFG or the Group), when required in view of its strategic role in advancing the Group’s Asia-centric growth agenda. Parental backing is evinced by capital injections, interbank deposits and cash collateral placements. 

SMBC Malaysia’s gross impaired loan (GIL) ratio saw mild deterioration, rising to 0.3% as at end-September 2021 (end-March 2020: nil), but overall asset quality stayed commendable. Lending to one borrower who sought payment assistance was prudently classified as impaired. Stage 2 exposures jumped to 35.5% of total loans (end-March 2020: 14.4%), primarily due to the Bank’s conservative stance in downgrading accounts in industries identified as vulnerable, despite prompt repayments by the borrowers. 

While SMBC Malaysia does not anticipate the credit profiles of its loans to weaken significantly in the near term, its lending book is still concentrated in terms of borrowers and sectors, which renders the Bank susceptible to lumpy impairments. Even so, SMBC Malaysia’s loss absorption buffers are sizeable. Its GIL coverage (with regulatory reserves) and common equity tier-1 capital ratio were a solid 362% and 22.9%, respectively, as at end-September 2021.

SMBC Malaysia’s net interest margin (NIM) remains narrow as a result of substantial lending to top-tier corporates, which is generally lower yielding. Successive rate cuts in 2020 compressed its NIM to an annualised 1.0% in 1H FY Mar 2022 (FY Mar 2020: 1.2%), which is lower than the industry average. Pre-tax profit for the same period however almost tripled y-o-y to RM154.3 mil (1H FY Mar 2021: RM52.4 mil). The improvement stemmed from a net reversal of impairment charges amounting to RM24.8 mil (1H FY Mar 2021: allowance of RM71.5 mil) due to more favourable forward-looking macro-economic variables used in the Bank’s provisioning model. 


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

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


The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.