RAM Ratings has upgraded the long-term financial institution ratings of RHB Bank Berhad and its banking subsidiaries to AA1 from AA2.
Coming on the heels of the revision in the Group’s rating outlook to positive last year, the upgrade reflects sustained improvement in its credit metrics, which have proven to be resilient through the recent pandemic. The rating action also incorporates disciplined execution of business strategies over the years with tangible results. RAM expects the Group’s strong loss absorption buffers and improved profitability to help mitigate potential near-term asset quality deterioration and maintain its credit profile.
The Group’s portfolio rebalancing strategy in favour of individual and small-medium enterprise loans since 2015 has strengthened its domestic franchise, resulting in evident market share gains for these segments. A gradually diminishing corporate book as an outcome of the strategy also greatly reduces its susceptibility to lumpy impairments, which were the main drag on asset quality in the past. Overall gross impaired loan (GIL) ratio trended lower to 1.5% as at end-March 2022 (end-December 2020: 1.7%). Standing at 1.4% on the same date, the GIL ratio of its domestic book continued to outperform the industry’s 1.6%, with a small portion of loans (5% of domestic loan portfolio as at end-May 2022) still under repayment assistance.
RHB Bank boasts robust loss absorption buffers. Sizeable management overlays set aside since the start of the pandemic bolstered its loan loss coverage (including regulatory reserves) to 138% as at end-March 2022 (end-December 2020: 121%). At the same time, the Group’s post-dividend common equity tier-1 capital ratio was a sturdy 16.8%, notwithstanding a larger dividend payment last year.
With a five-year (2017-2021) average return on risk weighted assets of 2.4%, RHB Bank’s strong profitability is backed by diversified income sources and disciplined cost management. Its net interest margin grew to 2.2% in 2021 (2020: 2.1%), slightly narrowing to an annualised 2.1% in 1Q 2022. The margin stands to benefit from current rising interest rates, although keener deposit competition may negate some upside. This, coupled with reduced impairment charges and potential writebacks of management overlays when asset quality headwinds subside, may boost RHB Bank’s profit performance. Anticipated synergies from the digital bank formed by the Group and Boost Holdings Sdn Bhd are viewed to be credit positive, although only in the longer term.
The financial institution ratings of the Group’s core subsidiaries, RHB Islamic Bank Berhad and RHB Investment Bank Berhad, are equated to RHB Bank’s, considering their strategic importance to the latter.
