[RAM] RAM Ratings reaffirms Bank Islam's AA3/Stable/P1 ratings

RAM Ratings has reaffirmed Bank Islam Malaysia Berhad’s (the Bank) AA3/Stable/P1 financial institution ratings and the ratings of its sukuk programmes. 

The reaffirmations are based on our view that the Bank’s credit fundamentals will remain resilient even as the effects of the pandemic wear on. Readily available financial backing from Lembaga Tabung Haji (LTH or the Fund), the Bank’s largest shareholder, is another rating factor.

On 8 October 2021, Bank Islam assumed the listing status of its former holding company, BIMB Holdings Berhad. Syarikat Takaful Malaysia Keluarga Berhad – previously a sister company – was not placed under Bank Islam’s stable. Following the completion of this restructuring exercise, LTH’s effective stake in Bank Islam declined to about 48% (as at 8 February 2021: 53%). Nevertheless, the Bank is still a core investment of LTH and we expect the Fund to remain committed to maintaining the Bank’s financial standing. 

Bank Islam has a track record of strong asset quality, having kept its gross impaired financing (GIF) ratio consistently below 1% over the years (end-June 2021: 0.7%). Catering for heightened uncertainties, the Bank cranked up provisions last year. Its credit cost ratio rose to 39 bps in FY Dec 2020 (FY Dec 2019: 17 bps) and an annualised 16 bps in 1H FY Dec 2021, boosting GIF coverage to 235% as at end-June 2021 (end-December 2019: 174%). Healthy pre-provision earnings and sturdy capitalisation (common equity tier-1 capital ratio: 13.8%) also afford the Bank ample buffers for loss absorption.

Considerably higher than most banks’, Bank Islam’s proportion of financing under assistance measures was roughly 36% as at end-July 2021. As the bulk of the Bank’s retail financing is extended to civil servants with relatively stable employment, the high take-up could indicate that applicants opted for the recent Pemulih financing moratorium as a precaution. At point of application, roughly 98% of financing under relief was zero months in arrears. While impairments might begin to crystallise when assistance programmes gradually unwind, Bank Islam’s large portion (over 60%) of retail financing that is repaid through non-discretionary salary deductions or salary transfers will help contain credit risk to some extent.

Bank Islam’s net financing margin (three-year average: 2.5%) – among the widest in the industry – continued to support its overall performance, buoyed by high shares of lucrative personal financing (~30%) and current and savings account deposits (39% of total customer funding). Loftier credit costs and a RM136.4 mil modification charge crimped the Bank’s 2020 pre-tax profit, which fell 14% to RM728.2 mil. Return on risk-weighted assets was a lower 1.8% as a consequence (fiscal 2019: 2.2%). Some earnings headwinds could persist as provisions and modification charges stay elevated, albeit lower than last year’s.

Analytical contacts
Chow Kah Mun
(603) 3385 2501
kahmun@ram.com.my

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