MARC Ratings has affirmed its long- and short-term financial institution (FI) ratings of AA+/MARC-1 on China Construction Bank (Malaysia) Berhad (CCBM) with a stable outlook.

The long-term FI rating is notched down from the FI rating of its parent, China Construction Bank Corporation (CCB) of AAA based on publicly available information. The notching reflects our view that CCBM continues to be a strategic entity of its parent which, in addition to the significant operational linkages between them, has also extended an explicit intent of support of maintaining 100% ownership. MARC Ratings views the systemic importance of CCB to China’s financial system, and consequently the likelihood it would receive a very high level of support from the Chinese government, as a key driver of its AAA rating.

CCBM has recorded strong capitalisation levels as well as healthy liquidity and funding positions. However, the high total capitalisation level of 67.1% as at end-9M2022 reflects the challenges the bank has faced in expanding its loan base in recent years. For 9M2022, gross loans stood at RM1.3 billion (2021: RM1.6 billion). We expect loan growth to be spurred by the recovery in economic activities post-pandemic and on the back of renewed focus on strengthening business ties between Malaysia and China.

Among CCBM’s key clients are China-based companies involved in undertaking large construction and infrastructure projects under China’s Belt and Road Initiative. Accordingly, the bank’s loans tend to be sizeable with top five borrowers accounting for 54.7% of total loans. While asset quality metrics have remained strong, impairment could spike should asset quality issues occur given its large loan exposures. Both Basel III liquidity coverage ratio and net stable funding ratio of 301.4% and 230.4% as at end-9M2022 remain strong.

For 9M2022, net interest income was slightly lower y-o-y at RM60.0 million, mainly due to higher interest expense which led to a decline in net interest margin to 1.54% from 1.68%. As its loan base is expected to grow, its profitability would improve on expectation that impairment charges remain minimal.