TEXT-Fitch Affirms Hong Leong Bank at 'BBB+'; Outlook Stable

Wed Jan 23, 2013 1:30am EST

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(The following was released by the rating agency)

SINGAPORE, January 23 (Fitch) Fitch Ratings has affirmed Malaysia-based Hong Leong Bank Berhad's (HLBB) ratings, including its 'BBB+' Long-Term Issuer Default Rating (IDR) with Stable Outlook. A full rating action breakdown is provided below.

The IDR is driven by the 'bbb+' Viability Rating, which in turn is premised on HLBB's record in sound asset quality, liquidity and profitability as well as its satisfactory capital levels. An even stronger domestic franchise and higher core capitalisation would likely benefit the bank's credit profile and be positive for its ratings. Event risks or aggressive expansion may have downward rating implications, especially if the balance sheet becomes over-stretched or exposed to countries with significant challenges surrounding the operating and regulatory environment.

Fitch expects HLBB's loan quality to hold up better than most Malaysian banks through economic cycles, due to its prudent risk appetite and management. This, alongside HLBB's revenue diversity, firm control over operating costs and incremental synergies from the recent merger with EON Bank, has helped to keep its risk-adjusted profitability above the industry average. Earnings and reserves should provide a strong defence against a potential rise in credit costs in a renewed downturn scenario, thereby keeping its risk profile largely intact.

Funding stability is backed by HLBB's domestic franchise and its large share of retail deposits. HLBB's loans/deposits ratio of around 74% is one of the lowest in the industry, reflecting its discipline in maintaining a liquid balance sheet, as well as a modest reliance on wholesale funds. Liquid assets (comprising government securities, interbank assets and unencumbered short-term funds) amply cover all short-term money market obligations, and 25% of deposits.

Fitch assesses HLBB's core capitalisation as satisfactory in supporting risks from its banking operations, as well as potential risks from its associate investments and immediate holding company, Hong Leong Financial Group (HLFG). The Basel III framework would require the bank to gradually switch to common equity, instead of Tier 2 capital, to support its associate banks, and the extended implementation timeframe would support the bank's transition and compliance. HLFG has a satisfactory debt-servicing track record which, together with ample liquidity in Malaysia's financial sector and HLBB's sound credit standing, helps mitigate refinancing risks.

The Support Rating and Support Rating Floor reflect Fitch's view of a high probability of extraordinary state support for HLBB, if needed. This view is based on the bank's systemic importance to the domestic economy - as the fourth-largest bank, accounting for about 9% of system-wide deposits - and the government's record of supporting distressed financial institutions.

The senior notes are rated at the same level as HLBB's Long-Term IDR as they constitute the bank's direct, unconditional and unsecured obligations and, hence rank equally with them. The deposits are rated one notch above the Long-Term IDR to reflect Malaysia's depositor preference regime, where depositors would rank above senior unsecured creditors in a liquidation scenario.

HLBB's full list of ratings:

- Long-Term IDR affirmed at 'BBB+'; Outlook Stable

- Short-Term IDR affirmed at 'F2'

- Viability Rating affirmed at 'bbb+'

- Support Rating affirmed at '2'

- Support Rating Floor affirmed at 'BBB-'

- Long-term deposits affirmed at 'A-'

- Senior debt affirmed at 'BBB+'

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