MARC has assigned a preliminary rating of AAA on Bank Pembangunan Malaysia Berhad’s proposed RM5.0 billion Islamic Medium-Term Notes Programme (IMTN Programme). Concurrently, the rating agency has affirmed its financial institution (FI) rating of AAA on Bank Pembangunan. The ratings outlook is stable.
The FI rating and outlook are mainly premised on Bank Pembangunan’s status as a wholly government-owned development financial institution (DFI) and on government support that has been extended to the DFI through government guarantees as well as compensation for loss of interest income and credit loss on problematic loans/financing directed to specific industries promoted by the government. The rating agency notes that the plans to consolidate the country’s main DFIs as announced by the government under Budget 2020 are very much at the preliminary stage. Should government support to the DFI be seen to weaken or if there are significant changes in the bank’s structure, mandate and operations as a result, MARC will revise its rating assumptions and assess the rating implication on Bank Pembangunan.
Bank Pembangunan’s loan/financing book continued to be dominated by the infrastructure segment, which accounted for 91.5% of the portfolio as at end-2018. The higher proportion of infrastructure loans/financing is also due to a sharp decline y-o-y in outstanding loans/financing in its other key portfolios: maritime by 19%, oil & gas by 11.5% and technology by 53.6%. Gross loans/financing outstanding fell to RM20.8 billion as at end-2018 from RM22.3 billion in the previous year as tepid growth was offset by large repayments. Going forward, MARC understands that new loans/financing disbursed will continue to be for infrastructure-related projects which are mainly government-initiated and therefore benefit from direct or indirect government support. This largely mitigates concentration risk.
Bank Pembangunan’s asset quality metrics recorded some improvement with the gross impaired loans, advances and financing (GIL) ratio declining to 11.0% as at end-2018 (2017: 12.1%). The improvement was largely due to higher write-offs; for 2018, the DFI wrote off RM778.4 million, mainly in the technology and maritime sectors. Profit before tax fell 19.9% y-o-y to RM260.7 million, largely due to reduced net interest income on the lower financing base. This translated into lower post-tax ROA and ROE of 0.65% and 2.19% (2017: 0.79%; 2.79%).
Bank Pembangunan’s capital position remained healthy, as reflected by its Basel I core and risk-weighted capital ratios of 30.8% and 37.0% as at end-2018, well above comparable peers in the DFI space. Bank Pembangunan’s strong capital position offers some buffer against asset quality weakness. The DFI’s funding profile remained largely supported by the government as reflected by government-guaranteed borrowings and deposits from the government and its related entities accounting for 26.7% and 24.3% of total funding. Proceeds from issuances under the proposed IMTN will be utilised primarily to fund future asset growth.
MARC notes that since 2H2018, the DFI has seen a complete revamp of its board and key management personnel. The new leadership has resulted in strategic initiatives aimed at enhancing the DFI’s credit management processes, risk appetite and controls, and asset liability management. In January 2020, Bank Pembangunan began a three-year strategic plan, which will broaden its scope to cover financing projects outside of its four focused sectors. The key criteria to participate in such projects are that they have significant social and developmental impact and are aligned to green and sustainability principles.
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