Wednesday, October 31, 2012


Oct 29, 2012 -

MARC has affirmed the issue rating of AAA on Oversea-Chinese Banking Corporation Limited's (OCBC) redeemable subordinated bond of up to RM2.5 billion with a stable outlook. The rating action takes into account OCBC’s sizable retail and corporate banking franchise in Singapore and Malaysia, its excellent asset quality, its good core earnings profitability, and strong regulatory capitalisation. The rating also incorporates OCBC’s observed ability to date to maintain strong credit metrics and weather periods of global financial uncertainty well, which MARC attributes to the banking group’s conservative practices and sound financial management.

OCBC’s recurring and stable core earnings capacity is underpinned by its strong banking franchise in Singapore and widening presence in strategic overseas markets. The group’s continued efforts to diversify its revenue streams, both in terms of products and geographic mix, and plans to increase cross-selling efforts within the financial services group, should benefit its earnings and capital generation capacity in future years.

The issue rating does not reflect any notching for subordination on the basis of the well-secured position of the subordinated bonds in OCBC's capital structure.

OCBC is the second largest banking group in Singapore and the second largest financial services group in Southeast Asia by assets. OCBC conducts its banking business through OCBC Bank, Bank OCBC NISP (in Indonesia) and Bank of Singapore. OCBC operates commercial banking operations in 15 countries and territories; its key markets are Singapore, Malaysia, Indonesia and Greater China. Its insurance subsidiary, Great Eastern Holdings (GEH), maintains a market leading position in life insurance in Singapore and Malaysia and continues to show profitable organic growth. The robust underlying businesses and franchises of OCBC and its significant subsidiaries have been reflected in the bank’s strong customer deposit-based funding profile and consistently strong non-consolidated and consolidated pre-provision earnings.

For the first six months to June 30, 2012 (1H2012), OCBC’s group level core net profit increased 23% year-on-year to SG$1.5 billion from SG$1.2 billion in the previous year’s corresponding period. Net interest income and non-interest income increased year-on-year by 17% and 15%. The increases were driven by loan growth, notwithstanding sustained interest margin compression, and higher wealth management income. Operating expenses increased only by 7% year-on-year, which helped improve OCBC’s cost-to-income ratio to 39.4%.

Loan loss provisioning charges moderated sharply from SG$96 million in the first quarter of 2012 (1Q2012) to SG$38 million in the second quarter (2Q2012), reflecting lower non-performing assets (NPA) in absolute terms while operating expenses edged up by 6%. OCBC posted a lower core net profit for 2Q2012 compared to 1Q2012, which represented an 18% decline quarter-on-quarter. Net interest income was slightly down as a result of increased interbank placements while strong fee income growth was offset by reduced trading income and life assurance profit amid a more challenging investment environment.

MARC views OCBC’s loan book to be of high quality; its non-performing loan (NPL) ratio of 0.9% as of end-June 2012 continues to be lower than that of its peer Singapore banking groups, although its peers have been more aggressive at building loan loss reserves. MARC views the current level of incremental NPAs as very manageable and notes that portfolio allowances had risen in FY2011 on account of faster loan growth, lower recoveries and write-backs. New NPAs dropped to SG$156 million in 2Q2012 from SG$303 million in 1Q2012. Provisioning costs in respect of specific and portfolio allowances also declined significantly quarter-on-quarter in 2Q2012. The banking group’s current credit exposure continues to be geographically concentrated with 52% and 16% of its total customer lending accounted for by its traditional markets of Singapore and Malaysia respectively as of end-June 2012. Going forward, the agency expects the bank to maintain strong asset quality given the overall weight of high credit quality Singapore-based lending exposures in its loan book and its prudent credit risk management practices.

As a result of brisk loan growth in recent periods, OCBC’s consolidated Tier-1 and total capital adequacy ratios are down from end-2010 levels to 14.1% and 15.5% but remain very strong. Capital generation remains supported by the quality of its earnings, while the group’s low risk appetite and conservative risk management provide comfort that capital will continue to be prudently managed.

The stable outlook reflects expectations that OCBC will maintain its sound financial profile over the intermediate term at the entity level as well as on a consolidated basis. MARC expects the credit profile of Singapore’s domestic banks to remain sound and banking system losses to remain low on account of the still healthy domestic household and corporate balance sheets which should continue to support debt affordability. Additional comfort is provided by Singapore’s high prudential standards and rigorous supervision of the banking sector.

Milly Leong, +603-2082 2288/;
Sharidan Salleh, +603-2082 2254/

EPF lifts Public Mutual suspension (By The Star)

KUALA LUMPUR: The Employees Provident Fund (EPF) has lifted the suspension of Public Mutual Bhd’s services as an approved fund management institution.
The suspension was lifted yesterday.
In a statement, Public Mutual said this followed its explanation that the violation was made by a unit trust consultant (UTC) who did not adhere to the company’s stern reminders on EPF’s rules and regulations. “With the lifting of the suspension by the EPF, Public Mutual continues to be an approved fund management institution under the EPF members’ investment scheme,” it said.

For more see:

Hong Kong to take non-religious approach to Islamic finance (By IFN)

HONG KONG: The Financial Services Branch of the Financial Services and the Treasury Bureau of Hong Kong has just issued its response to the Sukuk consultation paper issued in March 2012, indicating the republic’s interest in exploring the utilization of Hong Kong-based assets to underpin Sukuk issuances. The bureau had received 15 responses from a broad range of stakeholders, including the law society of Hong Kong, tax experts, lawyers and banks.
The paper, entitled: “Proposed Amendments to the Inland Revenue Ordinance (Cap.112) and the Stamp Duty Ordinance (Cap.117) to Facilitate Development of an Islamic Bond Market in Hong Kong” will primarily allow the facilitation of Hong Kong-based assets in a Sukuk issuance, via tax and stamp duty changes, as well as tax bond income which will ensure a level playing field for interest and coupon payments made under Sukuk.
Taking a page out of the UK’s approach to Islamic finance, the Hong Kong Treasury Bureau has opted to take a non-religion specific view on the proposed legal changes. Speaking exclusively to Islamic Finance news, Davide Barzilai, partner at Norton Rose revealed: “The key ethos is to create legal changes that are non-religion specific. Although they help Islamic finance, they are not going to include any Shariah terms or Arabic words. They are looking to adapt tax rules in a neutral way; the same way the UK have done it. For example, the word Sukuk will not be used in the legislation, but instead the term ‘alternative bond’ will be used— similar to the UK.”

For more see:

Tuesday, October 30, 2012

Public Mutual Bhd's services as an approved fund management institution, under the Employees Provident Fund (EPF) Members’ Savings Investment Withdrawal, has been suspended effective Oct 29




Public Mutual Bhd's services as an approved fund management institution, under the Employees Provident Fund (EPF) Members’ Savings Investment Withdrawal, has been suspended effective Oct 29.

As such, Public Mutual is prohibited from opening accounts for EPF members and/or receiving credit transfers from members commencing from yesterday, said an announcement posted on the institution's website since yesterday.

However, it added that the institution would still be responsible for managing existing members’ investments, if any, transferred before Oct 29, 2012.-- BERNAMA

RAM Ratings reaffirms ratings of RGB International’s debt issue

Published on 29 October 2012

RAM Ratings has reaffirmed the long- and short-term ratings of RGB International Bhd’s (RGB International or the Group) RM97 million Commercial Papers/Medium-Term Notes Programme (2007/2014) (CP/MTN) at BB2 and NP, respectively. The negative outlook on the long-term rating has been maintained. RGB International procures and manages slot machines at licensed casinos/gaming venues under concession agreements (TSM concessions), on behalf of the venue/licence owner. It currently has TSM concessions in Cambodia, the Philippines, Macau, Laos and Myanmar. The Group is also involved in the outright sales and marketing of slot machines and other gaming equipment.

The Group remained in the red for the fourth consecutive year with a pre-tax loss of RM32.87 million in FYE 31 December 2011 (FY Dec 2011) (2010: RM59.47 million), after the closure of gaming operations in hotels and clubs in Cambodia in 2008/09 as a result of regulatory changes. Apart from the loss of income, RGB International incurred hefty impairment and depreciation charges in respect of its slot machines.  As such, its balance sheet deteriorated further, with its gearing ratio increasing year-on-year (y-o-y) from 1.48 times to 1.66 times as at end-December 2011. That said, RGB International managed a marginal pre-tax profit of RM0.71 million in 1H FY Dec 2012, supported by an increase in TSM income and reduced depreciation charges on slot machines under its concessions (after full depreciation and write-off of some machines to zero value and the disposal of slots under a concession). Following healthier performances by the Group’s concessions in the Philippines and Laos, the TSM segment’s revenue rose 16.7% in 1H 2012. Accordingly, its annualised funds from operations advanced to RM55 million (1H 2011: RM39 million).

Meanwhile, RGB International’s liquidity stayed tight. As at end-December 2011, it had RM98.09 million of short-term borrowings against cash balances of only RM32.50 million. The Group had also displayed longer payables cycle since 2009, compared to its historical trends. RGB International’s short-term debt mainly comprised non-underwritten CP. Despite not being underwritten, it is observed that noteholders’ support in the roll-over of outstanding CP has been forthcoming, albeit at a higher interest rate. To alleviate its liquidity concerns, RGB International proposes to refinance its CP/MTN (with an unrated programme), allowing repayment of its obligations to be spread out over a longer maturity.

RAM Ratings continues to maintain a negative outlook on the Group’s long-term rating, in view of its precarious liquidity position and still-challenging business outlook. We opine that the successful refinancing of its CP/MTN is of significant importance. At the same time, a sustainable improvement in the performance of its TSM segment is critical to preventing any further deterioration of its balance sheet and liquidity. RGB International is required to bear the upfront costs of slot machines under its TSM concessions. We caution that its gearing ratio will worsen should it draw down substantial borrowings for asset purchases. Any further deterioration of the Group’s financial and liquidity positions may exert downward pressure on its ratings. On the other hand, the rating outlook may be reverted to stable if RGB International is able to address its liquidity strain and/or demonstrate sustainable improvement in its business and financial profiles.

Elsewhere, the Group’s operations remain vulnerable to regulatory changes which could disrupt its business. The gaming industry is often subject to regulatory controls, given its addiction factor and impact on social health. RGB International’s SSM and TSM businesses are also dependent on the expansion and capital-expenditure programmes of gaming establishments.

Despite the abovementioned challenges, the ratings take into account a degree of revenue stability that the Group derives from its TSM concession agreements, which generally run for an initial 5 years. Its established relationships with its clients and suppliers are also expected to give it an edge in the longer term.

Media contact
Evelyn Khoo
(603) 7628 1075

RAM Ratings reaffirms Kesas’ debt rating; outlook revised to negative

Published on 29 October 2012

RAM Ratings has reaffirmed the AA3 rating of Kesas Sdn Bhd’s (“Kesas” or “the Company”) RM800 million Al-Bai’ Bithaman Ajil Islamic Debt Securities (2002/2014) (“BaIDS”). However, the outlook on the long-term rating has been revised from stable to negative. Kesas is the toll concessionaire for the 35-km Shah Alam Expressway (“the SAE” or “the Expressway”) under a concession agreement (“CA”) that is valid until 18 August 2023.

The negative outlook signals that the rating of the BaIDS may come under downward pressure if Kesas continues making distributions to its shareholders, thereby eroding the Company’s future cash buffers. This follows a RM48.5 million dividend payment to Kesas’ shareholders in FYE 31 March 2012 (“FY Mar 2012”) and a lumpy RM278 million that will come due under the BaIDS in fiscal 2014, relative to the Company’s projected pre-financing cashflow of RM197 million for the same year. It is crucial that Kesas retains cash, particularly by curtailing distributions to its shareholders, to cushion against any liquidity pressure.

RAM Ratings’ assessment assumes no further distributions to Kesas’ shareholders via dividends or interest expenses on its redeemable convertible unsecured loan stock for the remainder of the BaIDS’s tenure; this translates into projected finance service coverage ratios (“FSCRs”) (with cash balances, calculated on debt-repayment dates) of 1.22 times on 10 October 2013 and 2.06 times on 10 October 2014. Any deviation from our expectations will warrant a reassessment, and is likely to exert downward pressure on the rating.

On a more positive note, the Expressway has been showing commendable traffic-volume growth in recent years, despite the competition it faces from other routes such as Federal Highway Route 2 and the New Pantai Expressway. In FY Mar 2012, the Expressway’s average daily traffic climbed 7.9% year-on-year to 275,418 vehicles, supported by organic traffic-volume growth from the developments along the corridor (FY Mar 2011: +8.9%, 255,193 vehicles).

As with all toll concessionaires, however, the rating remains moderated by regulatory risk that is inherent for all toll-road projects, as well as single-project risk. To this end, RAM Ratings understands that there will be no toll-rate increase for Kesas from 2011 to 2015. However, compensation remains uncertain at this juncture. While we note that the Company is entitled to claim compensation from the Government for non-revision of tariffs, such redress may take non-monetary form. While our sensitised cashflow analysis shows that Kesas will have adequate cash to repay its outstanding financial obligations without any compensation from the Government, we highlight that distributions to its shareholders will have to be held back under such a scenario.

Media contact
Davinder Kaur Gill
(03) 7628 1118

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