RAM Ratings reaffirms EON Bank's A1/P1 ratings, maintains Rating Watch with positive outlook

Published on 27 June 2011
RAM Ratings has reaffirmed EON Bank Berhad’s (EON Bank or the Group) long- and short-term financial institution ratings at A1 and P1, respectively. At the same time, the ratings of its Innovative Tier-1 Capital Securities Issuance Programme of up to RM1 billion and Subordinated Medium-Term Notes (MTN) Issuance Programme of up to RM2 billion have been reaffirmed at a respective A3 and A2. We have maintained the positive Rating Watch on all the long-term ratings.

Hong Leong Bank Berhad (Hong Leong Bank) completed the acquisition of assets and liabilities of EON Bank’s parent company – EON Capital Berhad (EON Capital) – on 6 May 2011. All the assets and liabilities of EON Bank are targeted to be novated to Hong Leong Bank by 1 July 2011. The positive Rating Watch is underpinned by the imminent rating upgrade for EON Bank’s debt facilities upon the transfer of its assets and liabilities to Hong Leong Bank pursuant to a Vesting Order from the High Court, to mirror the credit standing of the obligor of its debt facilities, i.e. Hong Leong Bank. The financial institution ratings of EON Bank will likely be withdrawn. RAM Ratings reaffirmed Hong Leong Bank’s AA1/P1 financial institutions ratings on 29 April 2011, with a stable outlook.

The reaffirmation of EON Bank’s ratings is premised on the Group’s sound franchise in vehicle financing, with a market share of 9.0% as at end-December 2010. EON Bank’s healthy asset quality is reflected in its gross impaired-loan ratio of 3.6% as at the same date; its loan-loss reserve coverage over gross impaired loans improved from 83.0% to 89.6% over the same period. Mainly supported by stronger net interest income, EON Bank’s respective return on assets and return on equity were lifted to 1.1% and 14.1% as at end-December 2010 (end-December 2009: 1.0% and 11.9%). With loan-to-deposit ratio of 88.4% and liquid asset ratio of 31.9% as at the same date, the Group is deemed to have a healthy liquidity and funding position. In terms of capitalisation, EON Bank’s overall risk-weighted capital-adequacy ratio (RWCAR) and tier-1 RWCAR remained sound at a respective 15.4% and 10.9%.

Post-merger, EON Capital and Hong Leong Bank (the Merged Entity) will become the fourth-largest banking group in Malaysia, with about RM140 billion of assets. The Merged Entity’s market shares of the industry’s loans and deposits are estimated at 9.0% and 9.9%, respectively. Given the more balanced loan mix and higher penetration rates, particularly in retail lending, the Merged Entity is envisaged to have a better competitive position than its larger peers. Benefiting from Hong Leong Bank’s traditionally robust risk management processes and sound funding profile, the Merged Entity is expected to enjoy healthy credit metrics. Nevertheless, RAM Ratings is mindful of potential near-term integration issues along with a typical 2- to 3-year gestation period before the advantages of the merger can materialise.

RAM Ratings' Rating Watch highlights a possible change in an existing rating. It focuses on identifiable events such as mergers, acquisitions, regulatory changes and operational developments that place a rating under special surveillance by RAM Ratings. 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.

Ratings will appear on RAM Ratings' Rating Watch when some of the above events are expected to or have occurred. Appearance on RAM Ratings' Rating Watch, however, does not inevitably mean that the existing rating will be changed. It only means that a rating is under evaluation by RAM Ratings and a final affirmation is expected to be announced. 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.

Media contact
Amy Lo
(603) 7628 1078
amy@ram.com.my