Moving forward, it said growth outlook was expected to remain modest, supported by moderate growth in domestic demand and a still soft external environment.
KUALA LUMPUR: Fitch Ratings has upgraded the ratings of Hong Leong Bank Bhd
and revised the outlook on Malayan Banking Bhd's ratings to Stable from Negative.
The international ratings agency said on Friday it upgraded Hong Leong Bank's long term issuer default ratings (IDR) to 'A-' from 'BBB+' with a stable outlook as the latter's existing strengths are likely to be preserved in the medium term, despite the domestic economic challenges.
Fitch said the upgrade of Hong Leong Bank's IDRs and viability rating (VR) reflected its strengthened capitalisation, as well as its long-standing prudent risk appetite, sound asset-quality track record, and stable funding and liquidity profile.
“The bank's gross impaired-loan ratio remained low at 0.8% at end-March 2016, and loan-loss provisions of 127% of impaired loans provided further protection against potential credit slippage,” it said.
Fitch said importantly, Hong Leong Bank's Fitch core capital (FCC) ratio strengthened to 15.0% at end-March 2016 from 12.7% at end-June 2015 following a RM3bil rights issue in December 2015.
It also affirmed the long-term IDRs of Maybank and Export Import Bank of Malaysia Bhd (MEXIM) at 'A-'.
Fitch expects weak external demand and low commodity prices to impact the economies of Malaysia and other key Asian markets over the next one to two years.
“We believe asset-quality risks will continue to build in such an environment, although the extent of deterioration in the Malaysian banks' credit portfolios will depend on their respective sector and regional exposures,” it said.
Maybank
As for Maybank, it revised the outlook on the ratings to Stable from Negative as accommodative policy measures over the last several months should help cushion slowing economic growth in Malaysia.
Fitch pointed Maybank's other key markets, and more stable financial markets have reduced the uncertainty to the bank's overall credit profile relative to a year ago.
It noted that while asset-quality pressures remain but they were more adequately counterbalanced by Maybank's loss-absorption capacity in the form of an improved capital buffer, as well as its healthy core earnings generation and sound access to capital.
Maybank's IDRs and Viability Rating (VR) reflected its market-leading franchise in Malaysia, reasonably stable asset quality backed by a robust risk framework, diversified earnings sources, disciplined funding and liquidity management as well as improved capital buffers.
It pointed out Maybank's banking group's Fitch Core Capital (FCC) ratio improved to 14.6% at end-March 2016 from 12.9% at end-March 2015 (fully-loaded CET1 ratio end-March 2016: 12.4%; end-March 2015: 10.6%) due to continued capital retention through solid earnings and the bank's ongoing dividend reinvestment scheme.
Maybank's gross impaired loan ratio rose to 2.1% at end-March 2016 (end-2014: 1.5%) in large part due to deterioration in its offshore exposures in Indonesia, Singapore and Greater China. Loan-loss coverage fell to around 70% of impaired loans (end-2014: 96%) concurrently.
“We see continued asset-quality risks amid sluggish regional growth, but believe that such risks are likely to remain manageable for the bank in light of its stable and diverse revenue base, adequate risk controls and strengthened capitalisation,” it said.
Debt ratings of Maybank and Hong Leong Bank
“The senior notes of Maybank and Hong Leong Bank are rated at the same level as the banks' respective IDRs. This is because the notes constitute direct, unconditional and unsecured obligations of the banks, and rank equally with all their other unsecured and unsubordinated obligations,” it said.
Maybank's legacy Basel II-compliant subordinated notes are rated one notch below the VR, reflecting their subordinated status relative to claims from senior unsecured creditors, and the absence of any going-concern loss-absorption mechanism.
Maybank's Basel II-compliant hybrid securities are rated four notches below the VR, to reflect the deep subordination status of the securities and the presence of going-concern loss-absorption mechanisms, but also look-back provisions in the optional dividend deferral.
Mexim
Mexim's support rating of '1' reflects Fitch's view that there is an extremely high probability of sovereign support for the policy bank.
Hence, Mexim's support rating floor and LT IDR of 'A-', which are equalised with the LT IDR of the Malaysian sovereign.
Fitch said Mexim's senior debt is rated at the same level as its IDR, reflecting their senior unsecured status.
Mexim is a development financial institution with a specific mandate to finance and support Malaysian export and import activities and overseas projects.
“Fitch's extremely high expectation of sovereign support for the bank is derived from its unique policy role, the Malaysian sovereign's full ownership of the bank largely through the Minister of Finance, Inc. and past instances of support for the bank through capital injections and government funding facilities.
“Mexim is small in relation to Malaysia's GDP and its domestic banking system, suggesting that the sovereign is likely to be able to support the bank if needed,” it said.
Fitch also said the ratings on Maybank and Hong Leong Bank are unlikely to be upgraded in the near term, as their LT IDRs are already at the same level as that of Malaysian sovereign and in light of Firday's upgrade of Hong Leong Bank.
However, it cautioned that negative rating action may occur if recent improvements in the banks' capital positions are not maintained, or if their risk appetites increase significantly - such as through excessive loan growth and mergers and acquisitions - with no corresponding increase in loss-absorption buffers.
“The banks' rating profiles would also come under pressure if the economic cycle were to worsen materially, to an extent that asset quality and earnings significantly deteriorate and the banks' capitalisation, funding or liquidity positions weaken,” it said.
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