Fitch affirms Hong Leong Bank IDR at A minus, stable outlook

Fitch Ratings has affirmed the long-term issuer default rating (IDR) of Hong Leong Bank Bhd at

KUALA LUMPUR: Fitch Ratings has affirmed the long-term issuer default rating (IDR) of Hong Leong Bank Bhd at “A-”  with a stable outlook.

It said on Monday Hong Leong Bank's  IDRs and viability rating are anchored by its conservative risk appetite and granular, retail-centric loan book, which drive its stable asset quality and earning performance through business cycles. 

“This is reflected in its low impaired-loan ratio of 0.8% at end-March 2019, compared with the sector average of 1.5%,” it said.

However, Fitch pointed out global trade uncertainty, domestic policy headwinds and a supply overhang in certain key property sub-segments are likely to weigh on the operating environment. 

Fitch expects Malaysia's economic growth to soften, though only slightly to 4.4% in 2019, backed by the well-diversified economy and export base.

“Notwithstanding, we expect Hong Leong Bank's credit quality to remain sound given its disciplined underwriting practices and strong client selection, characterised by a largely secured, retail-loan portfolio. 

“Hong Leong Bank 's Fitch Core Capital and common equity Tier 1 ratios of 17.0% and 12.6%, respectively, at end-1Q19 provide healthy buffers against unexpected slippage in asset quality,”  it said. 

The bank's steady retail deposit franchise should support its funding and liquidity profile. Customer deposits, of which 52% were retail deposits, are Hong Leong Bank's main funding source. 

Its conservative and disciplined approach to funding and liquidity is reflected in its modest loan/deposit ratio of 83% at end-March 2019. 

The bank's liquidity coverage ratio was 134%.

“The stable outlook reflects our expectation that Hong Leong Bank 's steady asset-quality performance, backed by prudent risk appetite and controls, should support its rating profile over the next 12-18 months,” it said.

Hong Leong Bank's support rating and support rating floor reflect Fitch's expectation of a high probability of sovereign support, if needed.

Hong Leong Bank's systemic importance as the fifth-largest local bank, accounting for around 8% of system-wide deposits; private ownership, unlike certain large Malaysian banks with stronger state links; and the state's ability to provide support, as reflected in Malaysia's sovereign rating of  “A-”.

Fitch also said the rating on Hong Leong Bank's medium-term note (MTN) programme is at the same level as its Long-Term Foreign-Currency IDR. This is because the senior notes issued under the programme constitute its direct, unconditional and unsecured obligations.

However, Hong Leong Bank's Long-Term Foreign-Currency IDR is unlikely to be upgraded in the near-term as it is already at the same level as that of the Malaysian sovereign. 

Negative rating action on the sovereign would be likely to lead to similar action on Hong Leong Bank 's ratings, as the sovereign rating is likely to constrain the bank's operating environment. 

Hong Leong Bank's operations are predominantly domestic. Aggressive growth or a severe downturn that may be triggered by a property bust or a significant deterioration in global growth would pressure the bank's credit profile. This could result in negative rating action, though such scenarios are not the rating agency's base case.