Bangkok--7 Apr--Moody's
Moody's Investors Service has affirmed Hong Leong Bank Berhad's ("HLB") C- Bank Financial Strength Rating ("BFSR"), A2/P-1 local currency long-term/short-term deposit ratings, A3/P-1 foreign currency long-term/short-term deposit ratings and A3 foreign currency subordinated debt ratings after the announcement of its proposed acquisition of EON Capital's assets and liabilities. The outlook for the ratings is stable.
EON Capital is the holding company and parent of EON Bank ("EBB", Baa2/P-3/D), Malaysia's seventh largest bank by assets.
"Goodwill and a resulting enlarged asset base would pressure capital considerably, but an emphasis on Tier 1 capital financing to moderate an expected fall in capital ratios from the mid-teens to the low teens mitigate the risks associated with the proposed acquisition," says John Tham, a Moody's Vice President and Senior Credit Officer.
"Indeed, HLB's ratings affirmation is contingent on Moody's expectation that the financing for the proposed acquisition would be timely and mostly comprise of high quality capital, with common equity accounting for the bulk of the total Tier 1 capital issued," adds Tham.
Furthermore, reinforcing the bank's ratings is the expectation that it has the potential to further strengthen Tier 1 capital through retained earnings.
If it appears unlikely that HLB can meet these conditions at the time of the acquisition, the bank's ratings would likely be reviewed for possible downgrade.
"The good liquidity and reasonably adequate profitability and asset quality -- on a proforma basis -- are also important considerations supporting HLB's ratings affirmation," says Tham.
Over the medium to long term, the proposed acquisition would benefit HLB's franchise as it would propel it to fourth from sixth in Malaysia by asset size and increase its branch network. It would also reinforce its systemic importance and the likelihood of regulatory support should the need arise. The bank's share of the loans market would rise to 9% from 5%. At the same time, its share of the deposit market would rise to 9% from 6%.
The resultant enlarged loan portfolio should increase HLB's gross loan-to-deposit ratio to a comfortable 69.6% from 54.8%. Moreover, the consolidation of EBB's sizeable car loan business would further put HLB's sizeable low-cost deposit base to more productive use and likely improve net interest margins.
Moody's further estimates that EBB's weaker, but improving asset quality, would raise HLB's NPL ratio to 3% from 2%. NPL reserve coverage is also expected to fall to 98% from 123.5%. These figures would still be healthy levels, considering the stabilizing nature of the economy and Moody's expectation that the financing would mostly comprise of high quality capital.
The transaction is subject to regulatory and shareholder approvals.
PREVIOUS RATING ACTIONS & PRINCIPAL METHODOLOGIES
The last rating action on HLB was taken on July 20, 2009 when its local currency long-term/short-term deposit ratings of A2/P-1, foreign currency long-term/short-term deposit ratings of A3/P-1 and foreign currency subordinated debt rating of A3 were confirmed with a stable outlook.
The principal methodologies used in rating HLB were "Bank Financial Strength Ratings: Global Methodology," February 2007 and "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology," March 2007, which can be found on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab.
Other methodologies and factors that may have been considered in the process of rating these issuers can also be found in the Rating Methodologies sub-directory on Moody's website.
Singapore
John Moh Kan Tham
VP - Senior Credit Officer
Financial Institutions Group
Moody's Singapore Pte Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (65) 6398-8308
Singapore
Karolyn C. Seet
Asst Vice President - Analyst
Financial Institutions Group
Moody's Singapore Pte Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (65) 6398-8308