RAM Ratings reaffirms ratings of RHB Capital, RHB Bank and RHB Islamic

Published on 29 November 2012

RAM Ratings has reaffirmed the respective long- and short-term financial institution ratings of RHB Bank Berhad (“RHB Bank”) and RHB Islamic Bank Berhad (“RHB Islamic”) at AA2 and P1. Concurrently, the issue ratings of RHB Capital Berhad (“RHB Capital” or “the Group”) and RHB Bank have also been reaffirmed (refer to Table 1 below). All the long-term ratings have a stable outlook.

Table 1: Issue ratings of RHB Capital and RHB Bank

	Rating(s)	Outlook
RHB Capital Berhad
RM1.1 billion Commercial Papers/Medium-Term Notes Programme (2009/2016)	A1/P1	Stable
RM150 million Commercial Papers/Medium-Term Notes Programme (2008/2015)	A1/P1	Stable
RHB Bank Berhad
RM3 billion Medium-Term Notes Programme (2007/2027) -     Senior Notes -     Subordinated Notes	AA2 AA3	Stable Stable
RM3 billion Multi-Currency Medium-Term Notes Programme (2011/2031) -     Senior Notes -     Subordinated Notes	AA2 AA3	Stable Stable
RM600 million Hybrid Tier-1 Securities Programme (2009/2069)	A1	Stable

Universal banker RHB Capital Group is a mid-sized financial-services provider in Malaysia. At present, approximately 95% of the Group’s earnings stem from the domestic market, where it has an established domestic banking franchise. The Group’s market position is anchored by RHB Bank, its core banking entity. RHB Bank holds a respective 9.3% and 8.0% of the local banking system’s loans and deposits. The ratings of RHB Islamic mirror those of RHB Bank as the former is deemed strategically important to the Group. The operations of the banking entities under the Group are integrated under its universal-banking model.

In the near term, the Group’s regional ambitions are expected to be driven by RHB Capital’s recent acquisition of OSK Investment Bank Berhad (“OSK IB”). Going forward, OSK IB (now a subsidiary of RHB Capital) and RHB Investment Bank Berhad will be merged, creating the largest domestic stockbroking firm with leading market shares in terms of both trading volume and value.

Apart from being able to leverage on OSK IB’s niche in arranging small-to-mid-market deals, the Group has also gained immediate access to the former’s markets in Indonesia, Hong Kong, China, Cambodia, Thailand and Singapore. While recognising the benefits of income diversity, we also note that the synergies between the newly acquired investment bank and the other banking entities within the Group will need time to materialise. Meanwhile, the Group’s proposed acquisition of PT Bank Mestika Dharma - a small Indonesian bank – is still under review, after having been put on hold due to recent regulations on the shareholding structures of Indonesian banks.

Although the Group exhibits healthier loan-quality indicators, its gross impaired-loan ratio is still higher than the Malaysian banking industry’s average. In FYE 31 December 2011 (“FY Dec 2011”), the Group recorded a pre-tax profit of RM2.0 billion, supported by loan expansion, lower credit costs, healthier contributions from its Islamic banking operations and stronger gains from foreign-exchange-related transactions. In 1H FY Dec 2012, the Group chalked up RM1.2 billion of pre-tax profit. With the abatement of impairment charges on exposures to collateralised loan obligations, we expect the Group’s profitability to remain steady this year.

At company level, RHB Capital’s financial leverage ratios are viewed to be relatively high. As at end-June 2012, it posted respective gearing and double-leverage ratios of 0.5 and 1.4 times. With the purchase of OSK IB primarily funded by the issuance of shares, these ratios are expected to ease to approximately 0.4 and 1.3 times. Nonetheless, they are still higher than those of the other non-operating financial-services companies within RAM Ratings’ universe.

Media contact
Kwan Ji-Ling
(603) 7628 1115
jiling@ram.com.my