RAM Ratings upgrades RHB Bank to AA1

KUALA LUMPUR (Aug 17): RAM Rating Services Bhd (RAM Ratings) announced on Wednesday it has upgraded the long-term financial institution ratings of RHB Bank Bhd and its banking subsidiaries to AA1 from AA2, with a stable outlook.

The upgrade, which it said came on the heels of a revision of the group's rating outlook to positive last year, reflects sustained improvement in the group's 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. We expect the group’s strong loss absorption buffers and improved profitability to help mitigate potential near-term asset quality deterioration and maintain its credit profile.," said RAM Ratings in a statement.

The rating agency said the banking group's portfolio rebalancing strategy that favours individual and small and medium enterprise loans since 2015 has strengthened its domestic franchise, resulting in evident market share gains in 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. The group’s 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 books continued to outperform the industry’s 1.6%, with a small portion of loans (5% of the domestic loan portfolio as at end-May 2022) still under repayment assistance," it noted.

And the bank has robust loss absorption buffers, said RAM Ratings.

"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 the first quarter of 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 write-back of management overlays when asset quality headwinds subside, may boost RHB Bank’s profit performance," it said.

RAM Ratings also expect the group to see synergies from the digital bank it formed with Boost Holdings Sdn Bhd — Axiata Group Bhd's fintech arm — which it views to be credit-positive in the longer term.

In April, the Boost-RHB consortium was named as one of the recipients of the country's five digital bank licences issued by Bank Negara Malaysia.