[RAM] RAM Ratings assigns A1 rating to MIDF; closely monitoring proposed acquisition by MBSB
RAM Ratings has assigned corporate credit ratings (CCRs) of A1/Stable/P1 to Malaysian Industrial Development Finance Berhad (MIDF or the Group). Concurrently, the Group’s core subsidiary, MIDF Amanah Investment Bank Berhad (MAIB) has been accorded financial institution ratings of A1/Stable/P1. A wholly owned subsidiary of MIDF and highly integrated with the Group, MAIB is the key contributor to the Group’s pre-tax profit. As such, its ratings are aligned with MIDF’s.
MIDF’s CCRs consider support from its sole shareholder Permodalan Nasional Berhad (PNB), its sturdy capitalisation, and steady income from its development finance business, balanced against a small but improving investment banking franchise, significant borrower and depositor concentration, as well as its fluctuating past earnings.
On 6 April 2022, Bank Negara Malaysia (BNM) gave its nod for Malaysia Building Society Berhad (MBSB, rated A2/Stable/P1 by RAM) to explore a possible acquisition of the Group. MBSB’s commercial banking operations – which centre mainly on retail financing – will complement the Group’s development finance, investment banking, and asset management businesses. If the exercise is successful, the merged entity will be the second largest stand-alone Islamic bank in Malaysia with access to full suite of banking services. We will closely monitor key developments on this front and reassess any impact – including the Group’s relationship with its shareholders – when more details such as ultimate shareholding, strategic fit and corporate structure of the merged entity become available. As part of a bigger consortium, MIDF also submitted a bid for a Malaysian digital banking licence. Outcome of the application is expected to be announced by BNM in due course.
MIDF was founded in 1960 as a developmental financial institution to promote the growth of the nation’s manufacturing sector by lending to small and medium enterprises (SMEs). Over time, the Group has evolved into a diversified financial services company involved in asset management, development finance, debt and equity capital markets fund raising activities, mergers, acquisitions & restructuring advisory, share margin financing, stockbroking, and treasury activities. MIDF aspires to be a digital Islamic bank in the long run.
As a 100% owned investment of PNB since 2007, MIDF has received various business support from its parent. MIDF has not required any capital injection from PNB thus far, given its strong capitalisation. Its common equity tier-1 capital ratio of 45.8% (as at end-June 2021) serves as an ample absorption buffer against potential losses. Still, we expect PNB to provide the necessary support should the need arise.
While it strives to be a digital Islamic bank, development finance remains a vital business for MIDF. The Group’s development finance division comes under the purview of the Ministry of International Trade and Industry (MITI), with which it enjoys a long established and close working relationship. MIDF has received sizeable grants from MITI which it channels to SMEs in the country. Income from development finance - consistently making up about 20% of the Group’s total income – has infused some stability into MIDF’s earnings profile. MIDF does not bear any credit risk of these government-financed loans as they are booked off-balance sheet.
Compared to its peers in the larger banking groups, MIDF’s investment banking franchise is small. However, both segments of debt and equity capital markets have gained good traction in recent years as the Group carves a niche in green and sustainable financing deals. As with other investment banks, MIDF’s income from capital market and stockbroking activities is volatile, fluctuating with market conditions. This, coupled with its decision to stop high-yield lending in FY Dec 2017 and some one-off cost in FY Dec 2018, led to the Group’s uneven profit performance over the past few years. In FY Dec 2020, MIDF’s pre-tax profit soared to RM96.1 mil (FY Dec 2019: RM57.1 mil) mainly fuelled by increased debt market transactions.
The Group’s involvement in debt market deals introduces lumpiness in its financing book. Due to a handful of legacy impaired loans, MIDF’s gross impaired loans (GIL) ratio was 17.4% as at end-June 2021. The potential impairment of an oil and gas exposure might lead to higher GIL ratio and some provisioning in the near future, although the asset quality of the rest of the performing loans is healthy. More importantly, loans constituted less than 25% of the Group’s assets whereas financial investments, primarily comprising government and government-guaranteed bonds/sukuk, formed the bulk of the remainder. Meanwhile, MIDF sources more than half of its deposits from government-linked entities. To manage the risk of depositor concentration, the Group has good relationships with depositors and maintains adequate liquidity at all times.
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Wong Yin Ching, CFA
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