BIX

we use cookies

We place cookies on your computer to remember your settings and understand how people use our website. By using this site you accept this.
Read More.

BIX ARTICLE

Investing in Banks' Capital Bonds and Sukuk

Jan 16, 2020

|

7 min read

Featured Posts

SRI Sukuk: The Journey Towards Sustainable and Responsible Investment

Jul 23, 2020

|

5 min read

Securities Commission's Capital Market Masterplan 3 (CMP3)

Sep 21, 2021

|

2 min read

What If We Allowed Retail Investors to Directly Invest in Malaysia’s Government Bond?

Aug 24, 2021

|

8 min read

Islamic Bonds Come Under Microscope After Garuda Indonesia Default

Aug 19, 2021

|

8 min read

Banner-Article.png
Why Invest in Banks’ Capital Bonds and Sukuk?

Introduction
 
Investing in banks’ capital bonds and sukuk can be a good start as everyone knows what the bank does (lend money at higher interest rates from deposits collected) and each of us normally has at least one bank account, other than the importance of the sector to drive economic growth as financial intermediaries.   The sector is governed by various authorities such as Bank Negara Malaysia and benchmarked against international banking regulations through Basel III to ensure stability in the global financial system. As compared to stocks, banks’ capital bonds coupon and sukuk profit distribution are more predictable than the dividend (which is subject to the profits that the banks made and the minimum capital that needs to be maintained as statutory requirements). On the other hand, banking stocks are more liquid with greater upside potential as compared to bonds and sukuk, but for those who seek steady income and regular distribution, having banking bonds and sukuk could be the better option.
 
  How the bank fund their operations?
The bank usually use our deposits (see term deposits) for lending – that’s how the Loan-to-Deposit (LDR ratio) can be a very useful tool to gauge how much of our money is used by the bank as loans. As of September 2019, Malaysia’s banking system LDR is reportedly at 88.5%, which means RM0.885 was lent out by the banks for every RM1.00 of our deposit, which is healthy compared to certain countries with more than 100% LDR. 
Besides deposits, banks can borrow from the capital markets in three usual structure – 1) senior debt; 2) subordinated debt (a.k.a Tier-2 capital) and 3) additional tier-1 capital (a.k.a AT1). 
 
 Capital Structure of The Bank

Five reasons to invest in Banks’ Capital Bonds/Sukuk

#1 – All Malaysian banks are Investment-Grade at every layer of capital
 
Every Malaysian banks are rated well above the minimum Investment-Grade rating of ‘BBB3’ for all capital type – from senior to subdebt and AT1.  This is due to the banks strong and resilient fundamentals, well-capitalised with robust assets quality and liquidity amid softer economic outlook which result in  slower loans growth expectations.
 
Rating Top-6 Mid-Small Foreign-backed
AAA MBB, CIMB, PBB, HLBB   OCBC, UOB, HSBC, SCB
AA1 MBB, CIMB, PBB, HLBB (Tier-2)   OCBC, UOB, HSBC (Tier-2)
AA2 RHB, AMBB   OCBC AT1
AA3 PBB AT1
RHB, AMBB (Tier-2)		 AFFIN, BIMB CIMB THAI
A1 CIMBGH AT1
HLBB, RHB, AMBB AT1		 ALLIANCE, AFFIN, BIMB (Tier-2)  
A2   ALLIANCE Tier-2
MBSB		  
A3   MBSB Tier-2
AFFIN AT1		  
BBB1   ALLIANCE AT1  
BBB2   MBSB AT1  
BBB3      
Source: Compilation from rating’s announcement (some ratings may have been withdrawn upon full redemption)
 
#2 Banks are highly regulated and monitored by the various authorities 
 
Malaysian banks are highly governed by local authorities such as Bank Negara Malaysia (BNM), Securities Commission, and Bursa Malaysia. Globally, banks are benchmarked against Basel III (or the Third Basel Accord or Basel Standards) as voluntary regulatory framework on bank capital adequacy, stress testing, and market liquidity risk. As a result, Malaysian banks have weathered a number of financial crisis unscathed and we can have a better sleep at night without worrying much about the banks we have invested.

#3 More Shariah-compliant financial instruments on offer compared to stocks
 
Investors have greater choices of shariah-compliant instruments to pick from sukuk which include the Islamic banking unit of Maybank, CIMB, Public Bank, RHB, HongLeong, AmBank and even HSBC Amanah as compared to a couple of shariah-compliant financial names (BIMB, Takaful) only available from stocks market in Bursa Malaysia currently.

#4 There are values across the capital structure of the bank you like
 
The lower we move from term deposits, more yield can be found from the same bank as the risk literally goes higher. For those who doesn’t enjoy the volatility from the stock market and prefer consistent income distribution, holding into perps and subdebt are the better options for them. While conservative saver could consider switching from their term deposits into senior debt for potential yield pick-up of around 40bps-80bps (depending on the duration of the senior debt).

The table illustrates how we can plot potential yield at different level of capital
Potential Yield at Different Level of Capital
 
#5 Get all the details of banking capital bonds and sukuk from the BIX Malaysia website
 
Investors may visit BIX Malaysia website to find important information on the banks and their capital structure whether it is senior, subdebt or AT1 (see #1), coupon/profit rate (#2), next payment date (#3), the latest trading activities (#4) and total outstanding amount of the security (#5) under “Security Information”. Other tabs are equally useful such as the “related documents and financials” (where you can find the Information Memorandum and Principal Terms & Conditions), rating movements, payment schedules and redemption as well as historical trading activities. 

https://www.bixmalaysia.com/Security-Info-Page.aspx?SBID=6636

Banking Capital Bonds and Sukuk

Author profile
Fakrizzaki Ghazali was a Fixed Income portfolio manager and analyst in an Writer.pnginvestment management firm in KSA, covering GCC and Global Sukuk markets. He previously worked as a credit strategist at one of Malaysia’s sell-side research house; also used to serve a private bank in Kuala Lumpur with focus on generating bottom-up ideas from both Investment Grade and High Yield bonds in the Asian credits space. Fakrizzaki started as an analyst at a local asset management having debuted his career as an auditor in one of the Big-4 firm. The article is his own opinion from experience in the industry for over sixteen years. He believes that retail investors need more high-yield ideas and be constantly guided as there are sufficient low-risk, high-quality bonds/sukuk offered in the market.




Disclaimer
This report has been prepared and issued by Bond and Sukuk Information Platform Sdn Bhd (“the Company”). The information provided in this report is of a general nature and has been prepared for information purposes only. It is not intended to constitute research or as advice for any investor. The information in this report is not and should not be construed or considered as an offer, recommendation or solicitation for investments. Investors are advised to make their own independent evaluation of the information contained in this report, consider their own individual investment objectives, financial situation and particular needs and should seek appropriate personalised financial advice from a qualified professional to suit individual circumstances and risk profile.

 The information contained in this report is prepared from data believed to be correct and reliable at the time of issuance of this report. While every effort is made to ensure the information is up-to-date and correct, the Company does not make any guarantee, representation or warranty, express or implied, as to the adequacy, accuracy, completeness, reliability or fairness of any such information contained in this report and accordingly, neither the Company nor any of its affiliates nor its related persons shall not be liable in any manner whatsoever for any consequences (including but not limited to any direct, indirect or consequential losses, loss of profits and damages) of any reliance thereon or usage thereof.

Related Tags

BIX

Advantages

Reasons to Invest

BIX Article

YOU MAY ALSO LIKE

ARTICLE
Monthly Fixed Income Report: January 2025

Feb 05, 2025

|

4 min read

ARTICLE
Monthly Fixed Income Report: November 2024

Dec 02, 2024

|

4 min read

ARTICLE
Monthly Fixed Income Report: October 2024

Nov 01, 2024

|

4 min read

ARTICLE
Malaysia Bond and Sukuk: Quarterly Report 3Q2024

Oct 08, 2024

|

7 min read