The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the securi ty’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations, transfer and convertibility risks, repatriation risk, currency risk or any other risk apart from credit risk. NOVEMBER 2012 BANK ISLAM MALAYSIA BERHAD Financial Institution Ratings
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BANK ISLAM MALAYSIA BERHAD Islam Malaysia Berhad 5 Bank Islam’sregional expansion plans include the acquisition of stakes in Islamic financial institutions in Indonesia and Bangladesh.
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The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the securi ty’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations, transfer and convertibility risks, repatriation risk, currency risk or any other risk apart from credit risk.
NOVEMBER 2012
BANK ISLAM MALAYSIA BERHAD
Financial Institution Ratings
The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the securi ty’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations, transfer and convertibility risks, repatriation risk, currency risk or any other risk apart from credit risk.
CREDIT RATING RATIONALE
FINANCIAL INSTITUTION RATINGS
NOVEMBER 2012
BANK ISLAM MALAYSIA BERHAD
– Rating Review
Summary
RAM Ratings has reaffirmed the respective long- and short-term financial
institution ratings of Bank Islam Malaysia Berhad (“Bank Islam” or “the Bank”) -
Malaysia’s first Islamic bank – at A1 and P1. The long-term rating has a stable
outlook.
The ratings consider Bank Islam’s strong branding in the Malaysian Islamic
banking sphere, although its franchise and market position within the overall
banking system (when compared to more-sizeable universal-banking groups) is
still limited. The Bank is primarily a retail-focused Islamic bank, with a high level
of concentration in unsecured retail financing; personal financing facilities make
up approximately 30% of its financing portfolio. The ratings also reflect the
backing of Lembaga Tabung Haji (“Tabung Haji”, Malaysia’s hajj pilgrims’ funds
board), i.e. the Bank’s ultimate controlling shareholder, in the form of capital
support and deposit placements. On this note, Bank Islam boasts a favourable
liquidity position and commendable funding profile, with an exceptionally low
financing-to-deposits ratio of 57% and a considerable proportion of low-cost
deposits. The Bank’s capitalisation position is also sturdy. As at end-June 2012,
its tier-1 and overall risk-weighted capital-adequacy ratios (“RWCARs”) stood at
14.4% and 15.6%, respectively (end-December 2011: 15.0% and 16.2%).
Bank Islam charted a 19% financing growth in FYE 31 December 2011 (“FY Dec
2011”). Its financing-quality indicators had improved, with a gross impaired-
financing (“GIF”) ratio of 2.0% as at end-June 2012. Although the Bank’s rapidly
expanding financing portfolio (with growth driven primarily by personal financing
facilities) may lack seasoning, salary deductions or salary transfers from
employers partially mitigate the risk of non-payment. Meanwhile, hefty write-offs
on legacy financing have eased, with the Bank’s credit-cost ratio moderating to
0.3% in FY Dec 2011. Last year, the Bank’s pre-tax profits grew 40% year-on-
year (“y-o-y”) to RM469.6 million1, supported by wide net financing margins.
1 With MFRS 139 restatements, Bank Islam’s pre-tax profits were RM492.5 million in FY Dec 2011 (an annualised 48% y-o-y growth). The Bank would have recorded a credit cost ratio of 0.2% while its tier-1 and overall RWCAR would have been 15.6% and 16.8% respectively, as at end-2011.
Analysts: Kwan Ji-Ling (603) 7628 1115 [email protected] Wong Yin Ching (603) 7628 1117 [email protected] Principal Activity: Islamic banking Rating Type: Financial Institution Ratings Ratings: A1/P1 [Reaffirmed] Rating Outlook: Stable Last Rating Action: 21 November 2011
Bank Islam Malaysia Berhad 2
Bank Profile
Figure 1: Bank Islam’s shareholding structure, with major subsidiaries & associate
Bank Islam Malaysia Berhad
Al-WakalahNominees
( Tempatan) Sdn Bhd
100%
BIMB Investment Management
Berhad
100%
Bank Islam Trust Company (Labuan)
Ltd
100%
Dubai Financial Group LLC BIMB Holdings Berhad
Lembaga Tabung Haji
30.5% 51% 18.5%
51%
BIMB Offshore Company
Management Services Sdn Bhd
100%20%
Amana Bank Limited
Source: Bank Islam
Bank Islam is Malaysia’s first Islamic bank. It commenced operations in 1983,
following the enactment of the Islamic Banking Act that same year. As at end-
September 2012, the Bank had 125 branches nationwide. Bank Islam is the third-
largest commercial Islamic bank in Malaysia, with an asset base of RM33.8
billion as at end-June 2012. In terms of financing and deposits, the Bank ranks a
respective 5th and 2
nd in the domestic Islamic banking industry, as at the same
date. While Bank Islam commands notable market shares in the Islamic banking
sphere, its market position and franchise are still limited in the overall industry
compared to the universal-banking groups.
Bank Islam’s business activities are segregated into consumer banking,
commercial and corporate banking, and treasury operations. Consumer banking
remains its largest earnings contributor, accounting for approximately half of the
Bank’s revenue and profits (before operating expenses and taxes). The Bank
also provides Ar-Rahnu (or pawnbroking) services.
Notable market shares in the Malaysian Islamic banking sphere
Consumer-banking segment – largest earnings
contributor
Bank Islam Malaysia Berhad 3
Figure 2: Bank Islam’s segmental revenues in FY Dec 2011
Consumer Banking
50%
Corporate &
Commercial Banking
12%
Treasury29%
Others9%
Source: Bank Islam
The Bank’s current shareholding structure is a result of a recapitalisation
exercise, following sizeable losses that had wiped out its shareholders’ funds and
capital base in fiscal 2005 and 2006. Bank Islam had subsequently been
recapitalised through a RM1.01 billion infusion that had led to the issuance of
new shares to Tabung Haji and Dubai Financial Group LLC.2 Tabung Haji, the
hajj pilgrims’ funds board that in aggregate holds 44.5% of the Bank through
direct (18.5%) and indirect (through a 51%-stake in BIMB Holdings Berhad
(“BIMB Holdings”, an Islamic financial-services holding company) interests, is
Bank Islam’s ultimate majority shareholder. In October 2012, BIMB Holdings
received Bank Negara Malaysia’s approval to commence negotiations with Dubai
Financial Group LLC on the potential acquisition of the latter’s 30.5%-stake in
Bank Islam. Should this materialise, Tabung Haji’s effective interest in Bank
Islam will increase to approximately 60%.
RAM Ratings also notes plans for Bank Islam to assume the listed status of
BIMB Holdings. The Bank completed a corporate exercise in February 2012,
through which RM1.2 billion of historical accumulated losses had been written off
against balances in its share-premium account and regulatory reserves. We
understand that the listing exercise is expected to be completed in 2013, albeit
still subject to market conditions and the receipt of the necessary approvals. All
said, we do not envisage this to have any material credit impact on Bank Islam.
2 Dubai Financial LLC is the financial-services arm of Dubai Holdings, an investment-holding
company held by the Dubai government.
Tabung Haji may raise stake
Plans to assume parent’s listed status
Bank Islam Malaysia Berhad 4
Business Strategies
After a period of severe losses and a recapitalisation exercise, Bank Islam
embarked on a 3-year Turnaround Plan between June 2006 and June 2009. This
Turnaround Plan had involved the entry of a new management team, a large-
scale reorganisation exercise and a fundamental revamp of the Bank’s
processes. Bank Islam’s current Sustainable Growth Plan, which commenced in
2009 and ends in December this year, aims to position it for domestic and
regional growth through improvements in business innovation, risk management
and franchise development.
Bank Islam will implement its Hijrah to Excellence plan in 2013. This new
business plan focuses on the achievement of robust organic growth and service
excellence. Among others, the Bank targets to chart an annual financing growth
of 25% and to have its non-fund based income (which primarily comprises fee
income) account for 20% of its earnings by 2015. To improve service levels, the
management intends to inculcate a customer-centric business model and focus
on product innovation. The realignment of the Bank’s balance sheet will continue
next year, including the attainment of a higher composition of secured financing
and a 60:40 ratio between floating- and fixed-rate financing (from the present
38:62). From a liability-management perspective, the Bank plans to focus on
promoting retail deposits. Bank Islam is also making efforts to increase its
corporate and commercial banking franchise - these two segments are expected
to make up a larger 30% of its financing portfolio, going forward (end-June 2012:
24%). That said, the Bank will retain its consumer banking focus, with consumer
financing accounting for the remaining 70% of its financing portfolio.
Having been admitted to the Securities Commission’s panel of principal advisors,
Bank Islam is able to advise on and submit corporate proposals, such as initial
public offerings and acquisitions, to the regulator for approval.3 The Bank’s close
links with Tabung Haji have facilitated deal referrals and enhanced the placement
capabilities of its corporate- and investment-banking division, which offers a suite
of capital-market and advisory solutions to larger corporates by leveraging on its
Shariah-structuring capabilities. Within the retail segment, Bank Islam’s
relationship with Tabung Haji gives it access to cross-selling opportunities and
alternative distribution channels.
3 The Bank had participated in TNB Janamanjung Berhad’s RM5.0 billion Islamic Securities
Programme, Pembinaan BLT Sdn Bhd’s RM10.0 billion Islamic Medium-Term Notes Programme and DanaInfra Nasional Berhad’s RM8.0 billion Government-Guaranteed Islamic CP/MTN Programme.
Sustainable Growth
Plan ends this year
To continue realigning balance
sheet in 2013
Close ties with Tabung Haji sharpen competitive advantage
Bank Islam Malaysia Berhad 5
Bank Islam’s regional expansion plans include the acquisition of stakes in Islamic
financial institutions in Indonesia and Bangladesh. In particular, the Bank has
explored avenues to acquire a stake in an Indonesian Islamic bank. With the
release of Bank Indonesia’s Financial Institution Ownership Policy in July 2012,
the management is currently reassessing its planned inorganic growth in
Indonesia. Elsewhere, Bank Islam also has a 20%-stake in Amana Bank Ltd
(“Amana Bank”, the first Islamic financial institution in Sri Lanka);4 the Bank
provides technical advice on Shariah governance, product development and risk
management to the latter.
Risk Profile
As at end-December 2011, the Bank’s assets were valued at RM32.2 billion,
after having charted a 6% y-o-y increase. The Bank also charted a 19% (or
+RM2.3 billion) y-o-y financing growth last year, primarily driven by the expansion
of its retail financing portfolio. In aggregate, retail financing had expanded RM1.7
billion, supported by increases in personal financing (+RM722 million), residential
property financing (+RM532 million) and transport vehicle financing (+RM315
million).
In the 6-month period ending FY Dec 2012, the Bank’s financing assets added
another RM2.3 billion (+16%, from end-December 2011) to RM16.4 billion.
Financing extended for personal purposes had been the main driver of this
growth, having climbed RM1.1 billion during the same period. Following its
stronger financing growth of late, the Bank’s financing assets have been
accounting for an increasingly larger proportion of its assets (48% or RM16.4
billion as at end-June 2012 compared to 39% or RM11.9 billion as at end-
December 2010). RAM Ratings notes, however, that the Bank’s rapidly
expanding financing portfolio (with growth driven primarily by personal financing
facilities) may lack seasoning.
4 Bank Islam completed a share-subscription exercise for a 20%-stake in Amana Bank in February
2011. The 20%-interest had been paid for via RM21.3 million cash, along with a share swap, through which the Bank exchanged a 6.3%-stake in Amana Investment Limited for Amana Bank shares.
Overseas expansion plans involve purchase of stakes in foreign Islamic banks
Rapidly expanding
financing portfolio
Personal financing main growth driver
Bank Islam Malaysia Berhad 6
Figure 4: Bank Islam’s financing profile (as at end-June 2012)
Primary agriculture1%
Mining & quarrying0%
Manufacturing 6%
Wholesale & retail trade, hotels, restaurants
3%
Construction7%
Real estate2%
Transport, storage & communications
1%
Finance, insurance &
business activities
1%
Education, health & others
1%
Other sectors
0%
House financing28%
Personal financing30%
Credit cards3%
Purchase of passenger cars13% Others
2%
Household sector76%
Source: Bank Islam
Financing facilities extended to individuals and the household sector (76%)
formed a large component of Bank Islam’s financing assets as at end-June 2012
and, in aggregate, showed a GIF ratio of 1.6% (end-June 2011: 2.4%). By
product type, personal financing facilities constituted the largest proportion of the
Bank’s financing assets, followed by home financing (28%) and financing for the
purchase of passenger cars (13%). Meanwhile, financing offered to corporates
and small and medium-sized enterprises (“SMEs”) only made up a respective
19% and 3% of its total gross financing portfolio. In total, these non-retail
portfolios had higher, albeit improving, GIF ratios. As at end-June 2012, the
Bank’s non-retail portfolio showed a GIF ratio of 3.3% (end-December 2011:
4.5%). Financing extended to the construction sector posted a somewhat higher
GIF ratio of 5.9%, partly due to a low-base effect and pre-2006 legacy financing.
At the same time, unsecured retail financing accounted for a third (33%) of Bank
Islam’s aggregate financing; these mainly comprised personal financing (30%).
While the concentration on unsecured personal financing exposes the Bank to
non-payment risk, salary deductions or salary transfers5 from employers partially
mitigate the risk of non-payment. A large portion (89%) of the Bank’s personal
financing portfolio was repaid through these methods, as at end-June 2012. The
personal financing facilities are mainly granted to employees of government-
linked entities and large corporates, and posted a low GIF ratio of 0.7% as at
end-June 2012 (end-June 2011: 1.7%).
5 Through the salary-deduction mechanism, the salaries of customers are paid into Bank Islam
accounts. The Bank uses a direct-debit arrangement to deduct repayment amounts once the salaries have been credited into their Bank Islam accounts. Under the salary-transfer mechanism, employers deduct repayments from the salaries of their employees and subsequently, the employers will send cheques to Bank Islam. As at end-June 2012, personal financing repaid through salary deductions had a GIF ratio of 0.41% while personal financing repaid through salary transfers had a GIF ratio of 0.30%.
Still primarily retail
bank...
...with sizeable proportion of unsecured retail
financing
Bank Islam Malaysia Berhad 7
The Bank’s clientele vis-a-vis residential property financing largely consists of
low-to-mid-end customers, with approximately 54% of the Bank’s outstanding
residential property facilities extended for the purchase of properties valued at
less than RM150,000 as at end-June 2012 (end-December 2011: 57%).
Nonetheless, the GIF ratio of Bank Islam’s residential property financing portfolio
has been easing, clocking in at 2.8% as at end-June 2012 (end-December 2011:
3.5%). The delinquency trends of this customer segment are likely to worsen in a
non-conducive economic environment. On this note, the Bank continues to
Capital base (RM million) 1,466.5 1,634.5 2,432.9 2,743.2 3,014.0
Tier-1 RWCAR 11.3% 12.3% 15.2% 15.0% 14.4%
Overall RWCAR 13.2% 13.9% 16.4% 16.2% 15.6%
0%
5%
10%
15%
20%
0
5,000
10,000
15,000
20,000
25,000
RM
mill
ion
Source: Bank Islam.
Note: Figures for capital base are net of proposed dividends.
Bank Islam’s capitalisation levels are considered sturdy, with a high proportion of
tier-1 capital. While slightly lower than the ratios as at end-December 2011 after
its proposed dividends, the Bank still posted strong tier-1 and overall RWCARs of
14.4% and 15.6% as at end-June 2012 (end-December 2011: 15.0% and
16.2%)9. These are expected to be able to adequately support its organic growth
over the medium term. We note that the Bank maintains internal overall and tier-
1 RWCARs of at least 13% and 10%, respectively. Bank Islam has also adopted
Bank Negara Malaysia’s Framework on Capital Adequacy for Islamic Banks - the
equivalent of the standardised Basel II approach for conventional banks.
9 With MFRS 139 restatements, the Bank’s tier-1 and overall RWCAR were 15.6% and 16.8%
respectively, as at end-December 2011.
Sturdy
capitalisation
Bank Islam Malaysia Berhad 12
Corporate Information – Bank Islam Malaysia Berhad
Date of Incorporation:
1 March 1983
Commencement of Business:
July 1983
Major Shareholders:
BIMB Holdings Berhad Dubai Financial Group LLC Lembaga Tabung Haji
51.0% 30.5% 18.5%
Directors:
Dato’ Zamani Abdul Ghabi Dato’ Sri Zukri Samat Dato’ Paduka Ismee Ismail Johan Abdullah Zahari @ Mohd Zin Idris Zaiton Mohd Hassan Mohamed Ridza Mohamed Abdulla Abdullah Abdulrahman Abdullah Sharafi Mohammed Abdul Ghaffar Ghualoom Hussain Abdulla
Auditor:
KPMG Desa Megat & Co
Listing:
Not listed
Key Management:
Dato’ Sri Zukri Samat Dato’ Wan Ismail Wan Yusoh Hizamuddin Jamalluddin Maria Mat Said Jamilah Abdul Sallam Khairul Kamarudin Mashitah Hj Osman Norashikin Mohd Kassim Abdul Rashid Abdul Hamid Jaafar Abu Mizan Masram Mohd Nazri Chik Mujibburahman Abd Rashid Wahid Ali Mohd Khalil Malkit Singh Maan Ryan Liew Choon Ching Dato’ Norasni Ayob Jeroen PMM Thijs Leong David @ Leong Sze Khiong
Managing Director General Manager, Strategic Relations General Manager, Strategic Planning General Manager, Legal & Secretarial General Manager, Human Resources Director, Business Development Director, Corporate Investment Banking Head, Treasury Head, Commercial Banking Head, Business Support Head, Recovery & Rehabilitation Head, Shariah Acting Head, Consumer Banking Chief Compliance Officer Chief Financial Officer Chief Technology Officer Chief Operating Officer Chief Risk Officer Chief Internal Audit
Major Subsidiaries/ Associates:
BIMB Investment Management Berhad Bank Islam Trust Company (Labuan) Ltd Amana Bank Limited
100% 100% 20%
Capital History:
Year Remarks Amount (RM million)
Cumulative Total (RM million)
2004 2005 2006
Balance brought forward Issuance of 100,000,000 shares Issuance of 280,000,000 shares
100.00 280.00
500.00 600.00 880.00
2007 2010
Issuance of 845,490,000 shares Conversion of 540,000,000 convertible redeemable non-cumulative preference shares
845.49
540.00
1,725.49
2,265.49
Bank Islam Malaysia Berhad 13
unaudited
STATEMENT OF FINANCIAL POSITION (RM million) 30-Jun-08 30-Jun-09 31-Dec-10 30-Dec-11 30-Jun-12
+ Securities Sold Under Repurchase Agreements + Total Borrowings
Total Borrowings Senior Islamic Securities + Subordinated Islamic Securities
Hybrid Capital Islamic Securities + Other Borrowings
CAPITALISATION & LEVERAGE (%)
Internal Rate of Capital Generation (Net Profit/(Loss) - Dividends) / Average Total Equity
T ier-1 Regulatory Risk-Weighted Capital Adequacy Ratio (T ier-1 Capital Base - Proposed Dividends) / Risk-Weighted Assets
Overall Regulatory Risk-Weighted Capital Adequacy Ratio (Total Capital Base - Proposed Dividends) / Risk-Weighted Assets
FINANCIAL RATIOS Bank Islam Malaysia Berhad – Group
Bank Islam Malaysia Berhad 17
CREDIT RATING DEFINITIONS
Financial Institution Ratings
Long-Term Ratings
AAA
AA
A
BBB
BB
B
C
D
Short-Term Ratings
P1
P2
P3
NP
D
A financial institution rated AAA has a superior capacity to meet its financial obligations. This is the highest long-term FIRassigned by RAM Ratings.
A financial institution rated AA has a strong capacity to meet its financial obligations. The financial institution is resilientagainst adverse changes in circumstances, economic conditions and/or operating environments.
A financial institution rated A has an adequate capacity to meet its financial obligations. The financial institution is moresusceptible to adverse changes in circumstances, economic conditions and/or operating environments than those in
higher-rated categories.
A financial institution rated BBB has a moderate capacity to meet its financial obligations. The financial institution is morelikely to be weakened by adverse changes in circumstances, economic conditions and/or operating environments than
those in higher-rated categories. This is the lowest investment-grade category.
A financial institution rated BB has a weak capacity to meet its financial obligations. The financial institution is highlyvulnerable to adverse changes in circumstances, economic conditions and/or operating environments.
A financial institution rated B has a very weak capacity to meet its financial obligations. The financial institution has alimited ability to withstand adverse changes in circumstances, economic conditions and/oroperating environments.
A financial institution rated C has a high likelihood of defaulting on its financial obligations. The financial institution ishighly dependent on favourable changes in circumstances, economic conditions and/or operating environments, the lack
of which would likely result in it defaultingon its financial obligations.
A financial institution rated D is currently in default on either all or a substantial portion of its financial obligations, whetheror not formally declared. The D rating may also reflect the filing of bankruptcy and/or other actions pertaining to the
financial institution that could jeopardise the payment of financial obligations.
A financial institution rated P1 has a strong capacity to meet its short-term financial obligations. This is the highest short-term FIR assigned by RAM Ratings.
A financial institution rated P2 has an adequate capacity to meet its short-term financial obligations. The financialinstitution is more susceptible to the effectsof deteriorating circumstances than thosein the highest-rated category.
A financial institution rated P3 has a moderate capacity to meet its short-term financial obligations. The financialinstitution is more likely to be weakened by the effects of deteriorating circumstances than those in higher-rated
categories. This is the lowest investment-grade category.
A financial institution rated NP has a doubtful capacity to meet its short-term financial obligations. The financial institutionfaces major uncertainties that could compromise its capacity for payment of financial obligations.
A financial institution rated D is currently in default on either all or a substantial portion of its financial obligations, whetheror not formally declared. The D rating may also reflect the filing of bankruptcy and/or other actions pertaining to the
financial institution that could jeopardise the payment of financial obligations.
For long-term ratings, RAM Ratings applies subscripts 1, 2 or 3 in each rating category from AA to C. The subscript 1 indicates that thefinancial institution ranks at the higher end of its generic rating category; the subscript 2 indicates a mid-ranking; and the subscript 3
indicates that the financial institution ranks at the lower end of its generic rating category.
A Financial Institution Rating ("FIR") is RAM Ratings' current opinion on the overall capacity of a financial institution to meetits financial obligations. The opinion is not specific to any particular financial obligation, as it does not take into account theexpressed terms and conditions of any specific financial obligation.
Bank Islam Malaysia Berhad 18
RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes
third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has
no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the
objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM
Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.
RAM Ratings, its rating committee members and the analysts involved in the rating exercise have not encountered and/or are not aware of any
conflict of interest relating to the rating exercise. RAM Ratings will adequately disclose all related information in the report if there are such
instances.
Published by RAM Rating Services Berhad
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