RAM Ratings has assigned an AA2/Stable rating to Hong Leong Bank Berhad’s (Hong Leong Bank or the Group) Proposed Multi-Currency Subordinated Notes Programme of up to RM10.0 billion (the Proposed Multi-Currency Subordinated Notes Programme).

Published on 29 April 2014

RAM Ratings has assigned an AA2/Stable rating to Hong Leong Bank Berhad’s (Hong Leong Bank or the Group) Proposed Multi-Currency Subordinated Notes Programme of up to RM10.0 billion (the Proposed Multi-Currency Subordinated Notes Programme). Concurrently, we have reaffirmed Hong Leong Bank’s AA1/Stable/P1 financial institution ratings. The respective ratings of Hong Leong Bank’s and Prominic Berhad’s outstanding debt instruments have also been reaffirmed. Prominic Berhad is a subsidiary of Hong Leong Bank, established as a funding conduit for the issuance of up to RM1.4 billion of Subordinated Notes under the Group’s Stapled Securities Issuance.
Hong Leong Bank is a mid-sized commercial bank, ranking fifth in terms of assets among domestic banks in Malaysia. Hong Leong Bank’s asset quality has remained solid, underpinned by the Group’s conservative business model. As at end-December 2013, its gross impaired-loans ratio stood at 1.3% – better than the industry average of 1.8%. At the same time, Hong Leong Bank’s credit-cost ratio came in at a low 0.01%. The Group’s pre-tax profit clocked in at RM1.4 billion in 1H FY June 2014 (1H FY June 2013: RM1.3 billion), boosted by a higher net interest income and fee income as well as increased profit contributions from Bank of Chengdu. The Group’s funding and liquidity profiles are deemed favourable, as demonstrated by its loans-to-deposits ratio of 78.5% and liquid-asset ratio of 27.6% as at end-December 2013. Hong Leong Bank’s common-equity tier-1 capital ratio of 10.2% as at the same date is deemed sound.
The subordinated notes to be issued under the Proposed Multi-Currency Subordinated Notes Programme are Basel III-compliant and will qualify as tier-2 regulatory capital. The notes will also have a loss-absorption feature linked to the occurrence of a non-viability event. RAM believes that the risk of a Malaysian bank becoming non-viable is adequately captured in its long-term rating. This view incorporates our interpretation of circumstances that will constitute a non-viability event, as articulated in Bank Negara Malaysia’s Capital Adequacy Framework on Capital Components. The subordinated notes are rated one notch below Hong Leong Bank’s long-term financial institution rating, underlining the lower ranking of the notes in the priority of claims in the event of bankruptcy or liquidation, relative to the Group’s senior unsecured creditors.

Table 1: Debt instruments of Hong Leong Bank and Prominic

Instrument	Rating
Hong Leong Bank
Up to RM1.4 billion Capital Securities under Stapled Securities Issuance1	AA3/Stable/-
Up to RM1.7 billion Subordinated Notes (2010/2032)2	AA2/Stable/-
Up to RM2.0 billion Subordinated MTN Issuance Programme (2009/2029)2	AA2/Stable/-
Up to RM1.0 billion Innovative Tier-1 Capital Securities Issuance Programme  (2009/2069)1	AA3/Stable/-
Up to RM1.5 billion Nominal Value Subordinated Notes2	AA2/Stable/-
Proposed Multi-Currency Subordinated Notes Programme of up to RM10.0  billion or its equivalent in other currencies2	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
Up to RM1.4 billion Subordinated Notes under the Stapled Securities Issuance  (2011/2061)	AA3/Stable/-
Note: Prominic’s up to RM1.4 billion of Subordinated Notes are part of Hong Leong Bank’s up to RM1.4 billion of 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 an 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
Chan Yin Huei
(603) 7628 1180
yinhuei@ram.com.my