RAM Ratings: Firm state support underpins Sabah Development Bank’s AA1/Stable ratings

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1. Media Release RAM Ratings : Firm state support underpins Sabah Development Bank’s AA1/Stable ratings RAM Ratings has reaffirmed the ratings of Sabah Development Bank Berhad’s (SDB or the Bank) outstanding debt programmes at AA1/Stable/P1. The reaffirmation is anchored by our anticipation of firm support for the Bank from the Sabah State Government given its developmental role in the State. SDB has completed an internal restructuring exercise which entailed a de-merger and transfer of its non-banking businesses to various newly incorporated companies held under Sabah Development Berhad, a diversified holding company wholly owned by the Sabah State Government. The exercise minimises risks arising from nonbanking activities especially the Bank’s O&G operations. That said, the Bank may still face credit risks associated with related-party lending, which accounted for 18% of total lending as at end-December 2015. As a policy bank, SDB may be exposed to higher-risk credits. Given uncertain economic conditions, the Bank will focus instead on state-related financing. As at end-December 2015, healthy recoveries and a large write-off contributed to an improved, albeit still high, gross impaired-loan ratio (on a 6-months-past-due basis) of 7.7% (end-December 2014: 10.8%). Its loan-loss coverage stood at 110.1% as at end-December 2015, and would be substantially lower if loans 3 months past due, not classified as impaired (which accounted for 31% of total lending as at the same date) were taken into account. Tier-1 capital ratio stood at 15.6% as at the same date. Notably, as SDB is not regulated by Bank Negara Malaysia, its provisioning and impairment policies are not comparable with banking industry norms. SDB relies heavily on wholesale funding in view of its limited deposit-taking ability. As at end-December 2015, wholesale borrowings mostly in the form of short-tenured debt securities of up to 3 years, made up 67% of interest-bearing funds. This renders the Bank highly vulnerable during periods of tight liquidity. On balance, about 73% of SDB’s gross loans have a maturity period of 3 years or less. Furthermore, SDB’s close relationship with the Sabah State Government provides some assurance.
2. Instrument CP Programme of up to RM1 .5 billion in nominal value (2014/2021) and MTN Programme of up to RM1.5 billion in nominal value (2013/2033)# CP Programme of up to RM1 billion in nominal value (2013/2020) and MTN Programme of up to RM1 billion in nominal value (2012/2032)* CP Programme of up to RM3 billion (2012/2019) and MTN Programme of up to RM3 billion (2011/2036)^ RM1,000 million MTN Programme (2008/2028) Rating action Rating Reaffirmed AA1/Stable/P1 Reaffirmed AA1/Stable/P1 Reaffirmed AA1/Stable/P1 Reaffirmed AA1/Stable # The aggregate outstanding CP and MTN cannot exceed RM1.5 billion at any time. *The aggregate outstanding CP and MTN cannot exceed RM1.0 billion at any time. ^ The aggregate outstanding CP and MTN cannot exceed RM3.0 billion at any time. Analytical contact Chan Yin Huei (603) 7628 1180 yinhuei@ram.com.my Media contact Padthma Subbiah (603) 7628 1162 padthma@ram.com.my Date of release: 5 December 2016 The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’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. 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. Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant. Published by RAM Rating Services Berhad  Copyright 2016 by RAM Rating Services Berhad