[RAM] RAM Ratings reaffirms Sabah Development Bank's AA1 issue ratings

RAM Ratings has reaffirmed the AA1/Stable/P1 ratings of Sabah Development Bank Berhad’s (SDB or the Bank) debt instruments (Table 1) on expectation of extraordinary support from the Sabah state government in times of distress. 

Enjoying a strong relationship with the state government, SDB plays a strategic role in advancing Sabah’s socio-economic development. State government backing has taken the form of sizeable deposit placements, business referrals and letters of support for the Bank’s debt securities and borrowings. The Sabah Ministry of Finance has direct oversight of SDB through representation on the Bank’s board of directors.

With a gross impaired loan (GIL) ratio of 46.9% as at end-December 2021, SDB’s asset quality profile is still poor. The metric will likely stay elevated as lingering economic headwinds weigh on recovery prospects. Given that its real estate and construction exposures constituted 51% of total loans and the top five borrowers (excluding state-related loans) made up a sizeable 31%, the Bank’s portfolio exhibits high concentration risk. Under a new leadership since late 2020, we note ongoing measures to shore up the Bank’s risk management, such as tighter internal policies to reduce portfolio concentration, a revamp of lending processes, and more frequent credit reviews. The impact of these remedial actions will require time to materialise.  

GIL coverage levels were low at sub-30% due to SDB’s largely well-secured portfolio. That said, thin loan loss coverage limits the Bank’s capacity to absorb possible credit losses if security values plunge or if it is unable to dispose of properties held as collateral. This may exert pressure on its capitalisation (tier-1 capital ratio as at end-December 2021: 15.2%). Overall, SDB’s close ties with the state government provide assurance that it will benefit from ready support if required.

Pre-tax profit was 10% higher at RM88.2 mil in fiscal 2021 owing to lower credit charges and cost outlays, translating into a return on risk-weighted assets ratio of 1.2%. The Bank’s earnings profile is still highly sensitive to provisioning risks because of weak GIL coverage. SDB’s net interest margin shrank 62 bps to 2.7% after the Bank started suspending the accrual of interest on some GILs last year. Interest is accrued on an impaired loan so long as the value of pledged collateral exceeds outstanding balances. Profitability this year will remain suppressed by slimmer margins in view of the full-year impact of interest suspension, and still-elevated provisions.

As its deposit-taking ability is limited, SDB’s funding profile is reliant on wholesale borrowings. This may give rise to higher refinancing risk. The Bank has shifted its debt profile towards longer-dated funding in recent years to reduce this risk. It has also capped short-term borrowings at about 10% of total funding. Long-term debts now account for a higher 63% of total funding (five-year average: 49%).

Analytical contacts
Chow Kah Mun
(603) 3385 2501

Wong Yin Ching, CFA
(603) 3385 2555