RAM Ratings reaffirms Hong Leong Bank’s AA1/P1 ratings

Published on 13 December 2013

RAM Ratings has reaffirmed the AA1/Stable/P1 financial institution ratings of Hong Leong Bank Berhad (Hong Leong Bank or the Group) and the various issue ratings. RAM has also reaffirmed Prominic Berhad’s (Prominic) AA3/Stable rating. Prominic is a subsidiary established as a funding conduit for the issuance of the up to RM1.4 billion of Subordinated Notes under the Stapled Securities Issuance.

Hong Leong Bank is a mid-sized commercial bank, ranking fifth in terms of assets among the domestic banks in Malaysia. The Group accounts for about 8% of the banking system’s loans and deposits, with a sturdy foothold in automobile and property loans. In addition, the Group has an established franchise in the SME segment. Hong Leong Bank’s asset quality has remained solid, underpinned by the Group’s conservative business model. As at end-June 2013, its gross impaired-loan (GIL) ratio stood at 1.4% – better than the industry average of 1.9%. At the same time, Hong Leong Bank’s credit-cost ratio clocked in at a low 0.04%, aided by lower impairment charges following the adoption of Malaysian Financial Reporting Standard 139 with effect from 1 January 2012 and strong recoveries. These ratios continued to improve in 1Q FY June 2014. The Group’s GIL coverage ratio of 130.5% as at end-September 2013 also remained well above the industry average. Moving forward, we expect the Group’s asset quality to stay sound, supported by its prudent credit culture.

In 1Q FY June 2014, the Group’s pre-tax profit clocked in at RM699.3 million (1Q FY June 2013: RM637.5 million), boosted by higher net interest income and write-back of impairment charges on loans as well as increased profit contributions from China-based Bank of Chengdu Co, Limited (20%-owned). The Group’s funding and liquidity profiles are favourable, as depicted by its loans-to-deposits ratio of 77.0% and liquid-asset ratio of 29.5% as at end-September 2013. Hong Leong Bank’s capitalisation is strong, underscored by the Bank’s common-equity tier-1 capital ratio of 10.0% as at the same date. 

Table 1: Debt instruments of Hong Leong Bank and Prominic

Instrument	Rating Action	Rating	Outlook
Hong Leong Bank
Financial Institution Ratings	Reaffirmed	AA1/P1	Stable
Up to RM1.4 billion Capital Securities under the Stapled Securities Issuance 1	Reaffirmed	AA3	Stable
Up to RM1.7 billion Subordinated Notes (2010/2032) 2	Reaffirmed	AA2	Stable
Up to RM2 billion Subordinated Medium-Term Notes Issuance Programme (2009/2029)2	Reaffirmed	AA2	Stable
Up to RM1 billion Innovative Tier-1 Capital Securities Issuance Programme (2009/2069)1	Reaffirmed	AA3	Stable
Up to RM1.5 billion Nominal Value Subordinated Notes 2	Reaffirmed	AA2	Stable
Notes: 1 The 2-notch rating differential between Hong Leong Bank’s AA1 long-term financial institution rating and the AA3 ratings of its RM1.4 billion Capital Securities and RM1 billion Innovative Tier-1 Capital Securities reflects the deeply subordinated nature and embedded interest-deferral feature of the hybrid instruments. 2 The 1-notch rating differential between Hong Leong Bank’s AA1 long-term financial institution rating and the AA2 ratings of its Subordinated Notes reflects the subordination of the debt facilities to its senior unsecured obligations.
Prominic Berhad
Up to RM1.4 billion Subordinated Notes under the Stapled Securities Issuance (2011/2061)	Reaffirmed	AA3	Stable
Note: Prominic’s up to RM1.4 billion Subordinated Notes are part of Hong Leong Bank’s up to RM1.4 billion Capital Securities. Each issue of Hong Leong Bank’s Capital Securities will be stapled to its Subordinated Notes. The Subordinated Notes carry the same rating as the RM1.4 billion Capital Securities given that Hong Leong Bank’s payment obligations to Prominic under the inter-company loan – which will be used to pay coupons on the Subordinated Notes – rank pari passu with the RM1.4 billion Capital Securities.

Media contact
Chew Wei Li
(603) 7628 1025
weili@ram.com.my