MARC Ratings has assigned preliminary ratings to Bank Muamalat Malaysia Berhad’s proposed Sukuk Wakalah programme of up to RM5.0 billion as follows:
• Senior Sukuk Wakalah at A+IS
• Tier-2 Subordinated Sukuk Wakalah at A-IS
• Additional Tier-1 Sukuk Wakalah (AT-1 Sukuk Wakalah) at BBBIS
Concurrently, the rating agency has affirmed its financial institution (FI) ratings of A+/MARC-1 on Bank Muamalat and its rating of A+IS on the bank’s Islamic Senior Notes Programme (Senior Sukuk) of up to RM2.0 billion. The outlook on all ratings is stable.
The ratings on the Senior Sukuk and the proposed Senior Sukuk Wakalah are equalised with Bank Muamalat’s long-term FI rating since they constitute the bank’s unsubordinated obligations. The Tier-2 Subordinated Sukuk Wakalah’s and the AT-1 Sukuk Wakalah’s two-notch and four-notch rating difference reflects structural subordination in line with MARC Ratings’ criteria.
The FI ratings affirmation considers Bank Muamalat’s sound asset quality metrics. The financing book comprised 77% of total assets as at end-2022. Gross impaired financing has continued to remain low (end-2022: 0.85%; end-2021: 0.83%), supported by strong financing growth (up 16.3% y-o-y in 2022 to RM24.3 billion) and recoveries. Retail financing backed by direct salary transfer arrangements comprised 60% of Bank Muamalat’s total financing, and this conservative lending policy benefits asset quality metrics. Financing loss coverage of 125.5% provides buffer against impairment risks.
The FI ratings also considers the bank’s healthy and improving profitability. Pre-tax profit rose to RM306.7 million in 2022 (2021: RM254.9 million) on the back of a larger financing base and lower impairment charges. Net financing income rose by 21.8% y-o-y to RM664.5 million in 2022 as the bank benefitted from multiple overnight policy rate hikes during the period, with faster repricing of its financing than deposits. During the period, return on assets and on equity improved to 0.75% and 7.90% (2021: 0.60% and 5.89%).
Bank Muamalat’s Common Equity Tier 1 (CET1) ratio of 12.5% and total capital ratio of 17.6% as at end-2022 were largely in line with its peers and provide adequate buffers to absorb asset quality and earnings pressures. A decline is possible on the back of strong financing growth, but we expect capital ratios to remain comfortable; the bank could issue subordinated sukuk under the proposed Sukuk Wakalah programme to support its capitalisation level. The rating agency notes that the retention of dividend over the years has also enhanced its capital.
Bank Muamalat relies heavily on wholesale funding (70.1% of total deposits as at end-2022), which could pose funding risks. Depositor concentration is high, with the 10 largest depositors accounting for 35.9% of deposits as at end-2022. However, concentration risk is mitigated by the fact that these are government-related entities, which tend to be stickier, in our view. Risks arising from high depositor concentration are also mitigated by adequate liquidity buffers. Liquidity coverage ratio and net stable funding ratio stood at 127.9% and 109.3% as at end-2022.