RAM Ratings has reaffirmed the AAA/Stable/P1 financial institution ratings of HSBC Bank Malaysia Berhad and HSBC Amanah Malaysia Berhad.
The reaffirmation reflects HSBC Malaysia’s solid domestic franchise, robust capitalisation, and superior funding and liquidity positions. The Bank’s underlying asset quality, though weakened in the last year, is still at a manageable level. The ratings also consider the expectation of ready financial support from the Bank’s ultimate parent, HSBC Holdings plc, in times of need, given its strategic importance to the latter.
HSBC Malaysia’s headline gross impaired loan (GIL) ratio spiked to 7.8% as at end-March 2022 (end-December 2020: 3.5%), largely due to the more prudent classification of a portion of loans under relief as impaired. Excluding these exposures and other differences from industry practice, HSBC Malaysia’s adjusted GIL ratio is estimated to be lower at 3.0% (end-December 2020: 1.8%) but still a deterioration from the last review. To some extent, the weaker-than-industry ratio also reflects the Bank’s shrinking loan base since 2019.
Asset quality slippage mainly stemmed from impairments related to a corporate borrower group in FY Dec 2021 and 1Q FY Dec 2022. Increased provisioning for these lumpy impaired loans led to a still-high credit cost ratio of 103 bps in FY Dec 2021 (FY Dec 2020: 92 bps). On balance, HSBC Malaysia’s adjusted GIL coverage (including regulatory reserves) stayed healthy at 117% as at end-March 2022. This, coupled with an above-industry common equity tier-1 capital ratio of 16.6% as at end-March 2022 (including unaudited net profit from 1Q FY Dec 2022), provides the Bank ample room to withstand potential credit losses.
While headwinds from inflationary pressures and labour woes may weigh on borrowers’ repayment ability, RAM views residual risks in HSBC Malaysia’s corporate lending portfolio to be manageable owing to its conservative underwriting standards. Prior to the recent asset quality blip, this portfolio has traditionally demonstrated solid asset quality, with its GIL ratio averaging 1.0% from 2016-2020.
Due to hefty impairment charges and a narrower net interest margin, HSBC Malaysia’s return on risk-weighted assets was a lower 0.8% in FY Dec 2021 (FY Dec 2020: 0.9%), weaker than that of peers, most of whom reported improved earnings last year. RAM expects the recent 50-bp rate hike and a prospective further increase in 2H 2022 to lift the Bank’s margins this year. Along with more moderate impairment charges, this should lead to a stronger bottom line this year, notwithstanding the impact of a one-off prosperity tax.
HSBC Malaysia has a high proportion of current and savings account deposits, which constituted 62% of total deposits as at end-March 2022 (industry: 33%). This is reflective of its entrenched foothold in cross-border cash management in view of its ability to leverage on its parent’s vast network and technical expertise.
