RAM Ratings revises rating watch on RHB and MBSB to positive, reinstates stable outlook on CIMB's ratings

Published on 17 October 2014

RAM Ratings has placed a positive watch on all rated entities under RHB Capital Berhad (RHB Capital) and Malaysia Building Society Berhad (MBSB), and reinstated the stable outlook on the rated entities under CIMB Group Holdings Berhad (CIMB).  Previously, the ratings of these entities had been put on developing watch when negotiations for a proposed merger had commenced. On 8 October 2014, CIMB, RHB Capital and MBSB had agreed in principle to key terms of the proposed merger and are now seeking regulatory approval.
RAM has reaffirmed the AAA/P1 ratings of CIMB’s key banking subsidiaries as we are of the opinion that the credit profiles of the respective merged entities would remain commensurate with the existing ratings. On the other hand, the positive watch on RHB Capital’s core banking entities (AA2/P1) and MBSB (A2/P1) reflects our view that the credit standing of these entities will be strengthened to the highest rating on our national scale when they become part of the proposed largest banking group in Malaysia.
The merged bank will enjoy a dominant franchise in Malaysia, with stronger financial muscle to pursue regional strategies and cement its position as the fourth-largest ASEAN banking group. With market shares of Malaysian deposits and loans in excess of 20%, its systemic importance would be enhanced. In addition, the enlarged bank would have a more diversified business and geographical mix. Nonetheless, in view of the scale and complexity of the merger exercise, challenges in talent retention, corporate culture and IT system integration could arise. That said, revenue and cost synergies should emerge over time if the merger process is well executed.
While the proposed share-swap deal will mitigate the impact of the merger on capitalisation, the pro forma common equity Tier 1 (CET-1) capital ratio of the merged entity will still lag behind that of the top 3 regional players. The CET-1 capital ratio would stand at about 9% immediately upon consolidation, with a management target of 9.5%. On the other hand, the pro forma double leverage ratio of RHB Capital – the surviving non-operating financial holding company – would be at a comfortable level of less than 1.20 times.
RAM views the proposed formation of the mega-Islamic bank as being in line with the nation’s aspiration to develop Malaysia into a key international Islamic financial hub. This would entail the acquisition of assets and liabilities of RHB Islamic and MBSB by CIMB Islamic. The merged Islamic bank would operate with its own branch network and infrastructure. One of the key objectives of the creation of a mega-Islamic bank is to capture cross-border Islamic finance transactions and strategic partner(s) may be brought in at a later stage. While MBSB would put a drag on the mega-Islamic bank’s asset quality on consolidation, the AAA/P1 ratings of CIMB Islamic as the surviving Islamic banking entity reflect our view that it will remain strategic to the enlarged group, given its role as the Islamic arm.
Following the above, RAM has revised MBSB’s RM495 million Tranche 1 Structured Covered Sukuk Commodity Murabahah (Covered Sukuk) rating watch from developing to positive. We note that the rating action on the Covered Sukuk is purely driven by the potential upside of MBSB’s financial institution ratings post merger and not the cover assets. Similar rating action has also been taken on RHB Bank-guaranteed issues. The affected issues are Tropicana Corporation Berhad’s Tranche 1 CP/MTN of up to RM300 million (2012/2019) and Mecuro Properties Berhad’s Guaranteed Class D1 under the RM900 million Nominal Value Bonds (2012/2019).
RAM’s Rating Watch highlights a possible change in an issuer's ratings. It focuses on identifiable events such as mergers, acquisitions, regulatory changes and operational developments that place a rated debt under special surveillance by RAM. In a broader sense, it covers any event that may result in changes in the risk factors relating to the repayment of principal and interest.
Issues will appear on RAM's Rating Watch when some of the above events are expected to or have occurred. Appearance on RAM's Rating Watch, however, does not inevitably mean that the rating will be changed. It only means that a rating is under evaluation by RAM and a final rating decision will be announced in due course. A "positive" outlook indicates that a rating may be raised while a "negative" outlook indicates that a rating may be lowered. A “developing” outlook refers to those unusual situations in which future events are so unclear that the rating may potentially be raised or lowered.

Table 1: Rating actions

	Previous Ratings	Current Ratings
CIMB Group Holdings Berhad
Corporate Credit Ratings	AA1/-/P1/RW_Developing	AA1/Stable/P1
RM6.0 billion Conventional and Islamic Commercial  Papers/Medium-Term Notes Programme (2008/2038)	AA1/-/P1/RW_Developing	AA1/Stable/P1
RM3.0 billion Subordinated Notes Programme (2009/2074)	AA3/-/RW_Developing	AA3/Stable
CIMB Bank Berhad
Financial Institution Ratings	AAA/-/P1/RW_Developing	AAA/Stable/P1
RM10.0 billion Tier-2 Subordinated Debt Programme	AA1/-/RW_Developing	AA1/Stable
CIMB Islamic Bank Berhad
Financial Institution Ratings	AAA/-/P1/RW_Developing	AAA/Stable/P1
CIMB Investment Bank Berhad
Financial Institution Ratings	AAA/-/P1/RW_Developing	AAA/Stable/P1
CIMB Thai Bank Public Company Limited
Financial Institution Ratings	AA2/-/P1/RW_Developing	AA2/Stable/P1
Up to RM2 billion Subordinated Debt Programme (2014/2044)	AA3/-/RW_Developing	AA3/Stable
RHB Capital Berhad
RM1.1 billion Commercial Papers/Medium-Term Notes   Programme (2009/2016)	A1/-/P1/RW_Developing	A1/-/P1/RW_Positive
RM150 million Commercial Papers/Medium-Term Notes  Programme (2008/2015)	A1/-/P1/RW_Developing	A1/-/P1/RW_Positive
RHB Bank Berhad
Financial Institution Ratings	AA2/-/P1/RW_Developing	AA2/-/P1/RW_Positive
Proposed Multi-Currency Medium-Term Note Programme of  up to RM5 billion  - Senior Notes  - Subordinated Notes	AA2/-/RW_Developing AA3/-/RW_Developing	AA2/-/RW_Positive AA3/-/RW_Positive
RM3 billion Multi-Currency Medium-Term Note Programme   (2011/2031)  - Senior Notes  - Subordinated Notes	AA2/-/RW_Developing AA3/-/RW_Developing	AA2/-/RW_Positive AA3/-/RW_ Positive
RM600 million Hybrid Tier-1 Securities Programme (2009/2069)	A1/-/RW_Developing	A1/-/RW_Positive
RM3 billion Medium-Term Note Programme (2007/2027)  - Senior Notes  - Subordinated Notes	AA2/-/RW_Developing AA3/-/RW_Developing	AA2/-/RW_Positive AA3/-/RW_Positive
RHB Islamic Bank Berhad
Financial Institution Ratings	AA2/-/P1/RW_Developing	AA2/-/P1/RW_Positive
Subordinated Sukuk Murabahah Programme of up to RM1   billion (2014/2034)	AA3/-/RW_Developing	AA3/-/RW_Positive
RHB Investment Bank Berhad
Financial Institution Ratings	AA2/-/P1/RW_Developing	AA2/-/P1/RW_Positive
Proposed Multi-Currency Medium-Term Note Programme of up to RM1 billion  - Senior Notes  - Subordinated Notes	AA2/-/RW_Developing AA3/-/RW_Developing	AA2/-/RW_Positive AA3/-/RW_Positive
RM245 million Subordinated Notes (2012/2022)	AA3/-/RW_Developing	AA3/-/RW_Positive
RM400 million Medium-Term Note Programme (2008/2022)	AA3/-/RW_Developing	AA3/-/RW_Positive
Malaysia Building Society Berhad
Financial Institution Ratings	A2/-/P1/RW_Developing	A2/-/P1/RW_Positive
Tranche 1 Structured Covered Sukuk Commodity Murabahah	AA1/-/RW_Developing	AA1/-/RW_Positive
Tropicana Corporation Berhad
Bank-Guaranteed Commercial Papers/Medium-Term Notes Programme of up to RM500 million (2012/2019)  - Tranche 1 – Up to RM300.0 million guaranteed by RHB Bank Berhad	AA2(bg)/-/P1(bg) /RW_Developing	AA2(bg)/-/P1(bg) /RW_Positive
Mecuro Properties Sdn Bhd
Guaranteed Class D1 of RM900 million Nominal Value Bonds	AA2(bg)/-/RW_Developing	AA2(bg)/-/RW_Positive

Media contact
Peter Kong
(603) 7628 1029
peterkong@ram.com.my