[RAM] RAM Ratings reaffirms Bank Rakyat's AA2/P1 ratings

RAM Ratings has reaffirmed Bank Kerjasama Rakyat Malaysia Berhad’s (Bank Rakyat or the Bank) AA2/Stable/P1 financial institution ratings (FIRs). We have also reaffirmed the ratings of the Bank’s sukuk, issued through its funding conduits (see Table 1). 

The reaffirmation is premised on Bank Rakyat’s strong foothold in personal financing (PF) and the Bank’s robust loss absorption capacity. Bank Rakyat boasts the largest share of the Malaysian market for PF, which is mostly extended to civil servants. Recent asset quality deterioration is expected to be amplified by the gradual expiration of pandemic-related relief measures. The Bank’s ample loss absorption buffers however will cushion further potential impairments. The rating reaffirmation also incorporates our view of ready support from the Government if needed, given Bank Rakyat’s status as a cooperative-cum-developmental financial institution (DFI).

As of end-August 2021, financing under relief came up to about half of Bank Rakyat’s total financing. While the actual impact is yet to be determined, modification losses from moratoria and other forms of assistance offered to borrowers since April 2020 could amount to a significant RM1.2 bil. Under regulatory forbearance measures granted to DFIs, the Bank is temporarily shielded from the full impact of modification loss, with a relatively small earnings impact in FY Dec 2020 and FY Dec 2021. The balance, which will be reflected through a downward adjustment of retained earnings on 1 January 2022, is estimated to shave off about 120 bps from the Bank’s capital ratios. This impact is manageable given its current solid capitalisation, afforded by a Basel I tier-1 capital ratio of 22.2% as at end-June 2021.

Bank Rakyat’s overall gross impaired financing (GIF) ratio edged up to 2.2% as at end-June 2021 (end-December 2019: 1.9%), primarily driven by the PF portfolio’s weaker GIF ratio of 1.2% (end-December 2019: 0.6%). Job losses or income cuts suffered by the borrowers due to the pandemic had led to higher defaults from its non-Angkasa collected PF portfolio.  The Bank’s credit cost ratio surged to 0.9% in FY Dec 2020 and 1H FY Dec 2021 (FY Dec 2019: 0.5%). Financing under relief doubled after the reintroduction of a six-month moratorium in July 2021. However, as PF facilities are largely extended to civil servants who enjoy relative job security, some may have opted for repayment relief as a precautionary measure. We expect non-discretionary salary deductions, through which PF is repaid, to limit asset quality deterioration as assistance measures are unwound. Bank Rakyat’s strong GIF coverage of above 150% provides further comfort.

In view of its dominance in the lucrative PF segment, Bank Rakyat generates strong net profits, averaging around RM1.6 bil in the past three years. The Bank’s net financing margin grew to 3.2% in FY Dec 2020 and 3.3% in 1H FY Dec 2021 (FY Dec 2019: 3.1%) owing to active deposit repricing following successive rate cuts last year, a fairly large share of fixed-rate financing and a higher financing to deposit ratio. A spike in impairment charges and lower non-financing income nonetheless caused pre-tax profit to slip 21.5% y-o-y to RM1.4 bil, translating into a return on risk-weighted assets of 1.7% (fiscal 2019: 2.3%). We expect the Bank’s full-year performance to be pressured by still-high impairment charges in 2H fiscal 2021.

Analytical contacts
Amy Lo 
(603) 3385 2509
amy@ram.com.my

Wong Yin Ching, CFA
(603) 3385 2555
yinching@ram.com.my