[RAM] RAM Ratings affirms Al Rajhi Malaysia's AA1 rating
RAM Ratings has affirmed Al Rajhi Banking & Investment Corporation (Malaysia) Berhad’s (ARBM or the Bank) financial institution ratings of AA1/Stable/P1.
The ratings enjoy a rating uplift from its stand-alone credit strength and consider a “high likelihood” of parental support from Al Rajhi Banking and Investment Corporation SJSC (the Group) – the world’s largest Islamic bank by total assets – in view of the Bank’s strategic importance to the Group. As a wholly owned subsidiary of the Group and a key overseas operating unit, ARBM’s business direction and operations are integral to the former’s growth strategy. Parental support has come in the form of a RM541 mil equity infusion, subscription to SAR810 mil of the Bank’s subordinated sukuk and the provision of a USD580 mil liquidity line, among others.
On its own, ARBM’s healthy asset quality and sound funding and liquidity profile are positive credit factors. However, its smaller franchise, modest capitalisation level and softer profitability indicators compared to peers, continue to weigh on the ratings. Its modest domestic franchise accounts for a share of less than 1% of the industry’s financing and deposits. The Bank has expanded rapidly in recent times with a capital infusion from its parent. Gross financing grew a respective 14% and 6% (annualised) in FY Dec 2023 and 9M FY Dec 2024.
As the Bank’s financing portfolio is largely focused on better-credit quality corporates, the quality of its financing portfolio has been resilient. ARBM’s gross impaired financing (GIF) ratio was a low 0.3% as at end-September 2024 (industry: 1.5%). Impaired financing almost entirely stemmed from the household segment. ARBM’s credit cost ratio went up to 38 bps in 9M FY Dec 2024 compared to 9 bps in FY Dec 2023 as impairment charges were incurred mainly on the personal use portfolio. Given tighter underwriting, the deterioration is expected to be contained. GIF coverage remains ample at 443% to absorb potential losses.
Having launched its digital bank, Rize, in December 2022, ARBM has revamped its retail strategy. Coupled with targeted campaigns and the introduction of structured deposits for high net-worth individuals, the Bank’s retail deposits grew exponentially, rising 412% over the 21-month period ended 30 September 2024, though from a small base. Individual depositors formed 16% of total deposits as a result, up from 5% as at end-December 2022. The Bank’s strong focus on cheaper funding saw its current and savings account (CASA) deposits surge 203% over the same period, constituting a larger 42% of total customer funding (end-December 2022: 26%).
Historically, the Bank’s hefty cost base and underperforming retail division have hindered earnings but its latest performance is reflective of efforts to boost earnings and control costs. Pre-tax profit was a record RM100.1 mil in FY Dec 2023 (FY Dec 2022: RM28.7 mil). This improvement was driven by stronger financing growth, higher investment income and reduced impairment charges. Through effective management of asset yield and growth in CASA deposits, the Bank’s net financing margin expanded further to 2.28% (fiscal 2023: 2.02%), contributing to a pre-tax profit of RM108.1 mil in 9M fiscal 2024. The annualised return on risk-weighted assets nonetheless stayed below peers’ at 1.2%, mainly due to a higher cost structure.
ARBM’s common equity tier-1 capital ratio of 10.5% as at end-September 2024 was among the industry’s lowest. The total capital ratio, however, was a strong 21.7% owing to the Group’s sukuk subscription.
Analytical contacts
Lee Yee Von
(603) 3385 2503
yeevon@ram.com.my
Sophia Lee
(603) 3385 2619
sophia@ram.com.my
Media contact
Sakinah Arifin
(603) 3385 2500
sakinah@ram.com.my