MARC has affirmed its financial institution (FI) ratings of A/MARC-1 on Bank Muamalat Malaysia Berhad (Bank Muamalat) and AIS rating on the bank’s Islamic Senior Notes Programme (Senior Sukuk) of up to RM2.0 billion. The ratings outlook is stable. The FI ratings reflect Bank Muamalat’s relatively modest size, strong capitalisation, moderate financial performance and weakening asset quality metrics.
Bank Muamalat registered a 6.2% growth y-o-y in financing portfolio in 1H2020. Its market share in the domestic Islamic banking industry’s gross financing and total deposits segments stood at a modest 2.6% and 3.2%. Consumer banking, consisting mainly of housing and personal financing, remains a key component of the bank’s financing portfolio. This amounted to 64.5% of the bank’s total financing of RM16.5 billion as at end-June 2020 (FY2019: 64.0%; RM16.0 billion) and contributed half of the bank’s total revenue.
During the period, the bank’s asset quality weakened with the gross impaired financing (GIF) ratio increasing to 1.46% from 1.31% at end-2019 (Islamic banking industry average 1H2020: 1.32%). The increase was mainly attributed to weakness in the manufacturing segment. Its financing loss coverage ratio stood at 76.1%. MARC views the bank’s asset quality will come under further pressure from the impact of the COVID-19 pandemic. Its strong capitalisation levels provide some mitigation against asset quality weakness; Tier 1 and total capital ratios stood at a healthy 15.4% and 18.0% (industry average: 14.0%; 18.3%). Additionally, the bank would be able to utilise its existing Basel III-compliant Subordinated Sukuk programme to support its capital position when required; a total of RM250 million has been issued as at end-September 2020.
In 1H2020, Bank Muamalat’s pre-tax profit fell 76.5% y-o-y to RM28.6 million, mainly on the back of lower income from financing due to deferred payments during the moratorium period. Additionally, the bank made a provision of RM23.7 million as a pre-emptive measure in view of the potential weakening of its asset quality due to the impact of the COVID-19 pandemic. For 2020, the bank’s performance will be affected by the modification loss for the six-month moratorium period of RM46.2 million in addition to lower financing income following substantial reduction in the overnight policy rate during the year. The stable outlook reflects MARC’s expectation that the bank’s performance and asset quality will be able to weather the current challenging economic conditions.