Moody's upgrades Hong Leong Bank baseline credit assessment

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

KUALA LUMPUR: Hong Leong Bank Bhd's improved asset quality and strong capital has prompted Moody's Investors Service upgraded the bank's baseline credit assessment (BCA) and adjusted BCA to a3 from baa1.

The ratings agency had on Friday also upgraded the banking group's counterparty risk assessments (CRA) to A2(cr)/P-1(cr) from A3(cr)/P-2(cr), and counterparty risk ratings (CRR) to A2/P-1 from
A3/P-2. The rating outlook is stable

Moody's had also affirmed the A3/P-2 deposits and (P)A3 foreign currency senior unsecured medium-term notes (MTN) rating of the bank.

“The upgrade of the BCA is driven by the bank's improved asset quality and strong capital. Hong Leong Bank's asset quality has been resilient to challenging operating conditions prevalent in Malaysia, with the bank reporting a 0.8% problem loans ratio at the end of September 2018, lower than 1% at the same date a year ago,” it pointed out.

It said the bank's capital buffer remains strong, with tangible common equity (TCE)/risk weighted assets (RWA) and TCE/total assets at 16.3% and 10.8% at the end of September 2018. 

Moody's expects that capital will remain strong, due to slow growth in RWAs in 2019-2020, and good bottom line profitability.

Despite a pressured net interest margin, Hong Leong Bank's return on average assets improved in fiscal 2018 (that ended on 30 June 2018) to 1.3%, from 1.1% in fiscal 2017, supported by improved efficiency, lower credit costs, and higher non-interest income and profit contributions from associates.

Funding and liquidity also remain strong for Hong Leong Bank. The bank is deposit-funded, with a loans-to-deposits ratio of 82% at the end of September 2018, which is the lowest among Moody's rated banks in Malaysia. The liquid assets ratio remained at a good level of 32% of banking assets as of the same date.

“Despite the BCA upgrade to a3, Hong Leong Bank's deposit and senior unsecured ratings were affirmed at A3/(P)A3, respectively, because these ratings are already positioned at the same level as the A3 Malaysia sovereign rating.

“The CRA and CRR were upgraded because the BCA was upgraded,” it said.

Moody's said as Hong Leong Bank's A3 long-term deposit ratings are at the same level as Malaysia's A3 sovereign rating, the bank's deposit ratings have no room for upgrade.

The A3 ratings could be downgraded if Malaysia's A3 sovereign rating is downgraded, or if Moody's downgrades Hong Leong Bank's BCA by multiple notches owing to a significant increase in the bank's problem loans ratio, a material weakening of its capital buffer, and/or a deterioration in its liquidity and funding profiles.
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