MARC has affirmed its long- and short-term financial institution (FI) ratings of AA+/MARC-1 on China Construction Bank (Malaysia) Berhad (CCBM). The long-term rating of CCBM is notched down from its parent China Construction Bank Corporation’s (CCB) public information rating of AAA from MARC. The outlook on all ratings is stable. CCB’s rating reflects its majority-owned status by the Chinese government and systemic importance to China’s financial system and economy as the nation’s second-largest bank. CCB’s strong total capitalisation of 17.5% as at end-2019 and high provisioning levels will enable the bank to withstand the impact from the COVID-19 pandemic.
The one-notch long-term rating differential between CCBM and CCB is underscored by the explicit intent of support extended to the subsidiary by the parent, CCB’s 100%-ownership in CCBM and the common branding that exists between both institutions. The support extended by CCB has recently been demonstrated by the parent’s full subscription of CCBM’s issuance of a subordinated loan amounting to US$200 million. The subordinated loan has bolstered CCBM’s capitalisation and improved its long-term funding profile.
MARC draws comfort from CCBM’s policy role to support China-based companies undertaking infrastructure projects in Malaysia under China’s Belt and Road Initiatives (BRI) framework. CCBM has extended funding to key BRI-related infrastructure projects to date. Additionally, the bank finances other China-based companies entering the Malaysian market, while it seeks to expand its lending to local entities at the same time.
CCBM registered strong loan growth of 16.0% y-o-y to RM2.7 billion as at end-2019, although the quantum remains modest, accounting for just 0.1% of the domestic banking sector’s gross loans. In terms of earnings, net profit grew by 43.3% y-o-y to RM16.4 million, with cost-to-income ratio improving to 63.7% in 2019 (2018: 70.2%). MARC expects the bank’s cost-to-income ratio to continue to moderate over time as its earnings base expands. The bank’s Basel III liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) stood at 245.9% and 155.9% as at end-2019, exceeding the minimum regulatory requirements.
CCBM’s customer base mainly comprises large corporates, with its top-five borrowers accounting for 36% of total loans outstanding as at end-2019. In light of the large exposures, any weakness in its loan book will lead to a large spike in impairments. This risk will be heightened by the economic impact from the pandemic. Nevertheless, the bank’s loan book is not exposed to retail and SMEs, which are likely to be segments most affected by the economic slowdown.