[RAM] RAM Ratings reaffirms Bank Muamalat's A2/Stable/P1 ratings

RAM Ratings has reaffirmed Bank Muamalat Malaysia Berhad’s (the Bank) financial institution ratings (FIRs) at A2/Stable/P1. 

The ratings consider the Bank’s healthy capitalisation and improving gross impaired financing (GIF) coverage, which afford a sound loss absorption buffer against potential asset quality weakening as relief measures expire and impaired financing surfaces. We have also reaffirmed the A3/Stable rating of the Bank’s RM1 billion Subordinated Sukuk Murabahah Programme (2016/2036). The one-notch difference between the Bank’s long-term FIR and the rating of the subordinated sukuk reflects the subordination of the facility to the Bank’s senior unsecured obligations.

Bank Muamalat’s GIF ratio was a low 0.8% as at end-December 2021 (industry: 1.4%; end-December 2020: 1.1%), supported by payment assistance measures and a rapidly expanding financing book (2021: +14.5%; Islamic banking industry: +8.2%). As at end-March 2022, financing under forbearance as a share of total financing fell to 4% (end-December 2021: 23%). Asset quality deterioration after relief measures are fully phased out and payment trends stabilise will be moderated by recovering economic conditions and a sizeable 39% share of payroll deductible financing.

The Bank’s financing book is fairly concentrated, with personal financing (PF) making up 27%. This portfolio had another strong year of growth in 2021 (+31%; 2020: 29%), mainly on account of financing extended to government executives and professionals. We draw some comfort from the high proportion of financing repaid through salary transfers, which reduces default risk. This arrangement involves customers maintaining salary accounts with the Bank, with payments being deducted after salaries have been credited. Going forward, Bank Muamalat will focus its efforts on growing its home and vehicle financing portfolios with a view to diversifying its financing base, though personal financing will still be a key segment.

A continued build-up of provision reserves last year resulted in stronger GIF coverage (including regulatory reserves) of 148% as at end-December 2021 (industry: 129%). The Bank’s common equity tier-1 capital ratio declined to 13.7% as at end-2021 (end-2020: 15.5%) owing to strong financing growth but is still deemed healthy.

Deposits growth, largely attributable to government bodies, was a slower 7.5% in FY Dec 2021 (FY Dec 2020: +13.5%). Bank Muamalat’s retail deposit franchise remains weak, with the proportion of retail deposits amounting to only 11% (industry: 38%). Its current account and savings account ratio of 36%, however, fared better than the industry’s 31%. As a result of its reliance on wholesale deposits, the Bank is predisposed to concentration risk – ten of its largest non-bank depositors made up just over a third of total deposits as at end-2021.

Bank Muamalat’s net financing margin (NFM) of 2.5% is among the highest in the industry, given its large proportion of high-yield PF facilities. Pre-tax profit jumped 47% to RM257 mil in fiscal 2021 due to a broader NFM, lower impairment allowances and a net modification gain. The Bank’s pre-tax return on risk-weighted assets was a higher 1.5% on improved earnings (2020: 1.1%) but still lower than peers’. A high cost to income ratio, albeit trending downwards, and a small proportion of non-financing income continue to constrain profitability. 

We expect Bank Muamalat’s 2022 earnings to be suppressed by a windfall tax and possibly higher credit costs (2021: 28 bps) following the withdrawal of payment assistance. NFM compression from slower personal financing growth will however be partly offset by the recent overnight policy rate hike and potentially another in 2H 2022.

Analytical contacts
Lee Yee Von
(603) 3385 2503

Wong Yin Ching, CFA
(603) 3385 2555