S&P Downgrades Five Malaysian Banks; Outlook Negative
NEW YORK, Sept. 25 /PRNewswire/ -- Standard & Poor's today lowered its ratings on five Malaysian banks and affirmed its public information ratings on seven Malaysian banks (see list below). Standard & Poor's also lowered its local currency counterparty credit rating on Malayan Banking Berhad and removed the rating from CreditWatch, where it was placed July 22, 1998 (see list below). The outlook is now negative. The Malaysian banking sector faces increasing economic and industry risk. The domestic economy continues to weaken as evidenced by the negative GDP growth in the last two calendar quarters, soft property sector, and weak stock market (despite a slight rally this month). Government policy actions over recent weeks have led to increased banking industry risk. Standard & Poor's considers that increased regulatory forbearance acts to defer the necessary cleaning out of the banks' balance sheet and should serve to increase the opacity of financial information. Such leniency is evidenced by a reduction in statutory reserve ratios, the retrospective relaxation of nonperforming loan and provisioning standards, and the loosening of exposure limits for loans for the purposes of stock purchases (including margin lending). Standard & Poor's has serious concerns about the general solvency of the Malaysian financial sector. Standard & Poor's expects gross nonperforming loans (NPLs) for the financial sector to more than double to a peak of 30%-32% of total loans by year-end 1999 from 13.2% in June 1998. At this level Standard & Poor's estimates that the recapitalization cost is Malaysian ringgit (RM) 36 billion (approximately US$9.5 billion). This implies a significant shortfall over RM16.0 billion to be provided by the government's recapitalization vehicle (Danamodal Nasional Berhad). While banking systems in neighboring countries are also in need of capital, they have adopted a more open policy with regard to foreign investment in, and ownership of, indigenous banks. Foreign investment is viewed as potential source of capital. However, recent foreign exchange controls implemented by the Malaysian government are more likely to act as disincentives to foreign investment. This, in conjunction with a lack of surplus capital in the domestic markets, has intensified Standard & Poor's solvency concerns of the Malaysian financial sector over the short to medium term. The contagion risk from the weaker financial institutions in the system to stronger institutions exists, although not to the same extent as in Thailand. Standard & Poor's expects Malayan Banking Berhad gross NPL level to more than double in calendar 1999 from 8.38% at June 1998. This view is premised on Maybank's high exposure to the troubled Malaysian corporate borrower sector, a market segment which Maybank traditionally leads; and the absence of a strong cushioning effect from the bank's overseas operations, owing to the regional economic downturn. Over the next 15 months, Maybank's capitalization, as measured by equity to assets, may fall back to levels prevalent in the early 1990s. Nonetheless, the bank's leading business franchise, capable management team, and credit underwriting skills, which are traditionally more conservative than the average Malaysian bank, are factors supporting the ratings in the investment-grade category. The announced RM1.5 billion recapitalization of the merged RHB Bank/Sime Bank and government guarantees on Sime Bank's portfolio is positive and will assist in providing the bank with additional flexibility in defending its capital base. Nevertheless, Standard & Poor's expects RHB Bank Berhad's NPL ratio and profitability to continue to deteriorate sharply, with the possibility that additional capital support may be required in the future. Arab-Malaysian Merchant Bank Berhad's (AMMB) ratings have been lowered as a consequence of its rising NPLs, which at June 1998 were 11.74% of total gross loans, up from 8.08% in March 1998. Standard & Poor's expects the bank's NPLs to peak at more than twice current levels and is concerned about the impact this will have on the merchant bank's capital base. AMMB's June 1998 equity-to-assets ratio, at 6.60%, may be insufficient to absorb the expected peak NPL level. The existing total provisioning for the NPLs, at 39.9%, will almost certainly be insufficient, thereby further pressuring the bank's capital base. Given these shortcomings, the ratings on AMMB remain on CreditWatch with negative implications because of continuing questions over the ability of the ultimate parent company (Arab-Malaysian Corp.), which is under creditor protection, to extend additional capital support. Standard & Poor's expects to resolve the CreditWatch listing by the last calendar quarter of 1998, during which time AMMB would be expected to have executed its contingency recapitalization plan. The absence of such, or an insufficient recapitalization, is likely to lead to a further ratings downgrade. Bank Bumiputra's pi rating downgrade is a reflection of its high 20.4% NPL ratio, at March 1998, and sharp loss, at RM1.4 billion, posted for its financial year ended March 31, 1998. Standard & Poor's expects asset quality to continue to deteriorate, with NPLs to peak at more than twice its current level. The proposed merger with Bank of Commerce (M) Berhad, which would see a dilution in the government's ownership in Bank Bumiputra, raises some uncertainty of the level of government support of the merged entity in the near future. Still, the governmental role played by the bank is the main factor sustaining the rating, even at the double-'Bpi' level. The pi rating on Hong Leong Bank Berhad was lowered in response to its higher-than-industry average NPL ratio. At March 1998, Hong Leong Bank's NPL was 9.34%, while the average for commercial banks was 8.05%. The bank's high loan growth over the past few years carries with it an inherent risk of a further sharp escalation in asset-quality problems. The triple-'Bpi' rating on Public Bank Berhad was affirmed in recognition of its still strong financial profile and superior asset quality in the Malyasian context. Similarly, Standard & Poor's considers that the projected financial profiles, after taking into account the likely deterioration in asset quality, of Ban Hin Lee Bank Berhad, Bank of Commerce (M) Berhad, Multi-Purpose Bank Berhad, Perwira Affin Bank Berhad, and Southern Bank Berhad can sustain their double-'Bpi' ratings. The triple-'Cpi' rating on the troubled Sime Bank Berhad was affirmed, pending its merger with RHB Bank Berhad. The merger is expected to be completed by the year end. OUTLOOK (MALAYSIAN BANKS): NEGATIVE The current ratings take into account Standard & Poor's expectations of future problem loan levels at individual banks, and government capital injections into certain of these banks. If problem loans were to exceed anticipated levels or capital injections not materialize, further downgrades are possible, Standard & Poor's said. -- CreditWire Ratings Lowered and Removed from Creditwatch Rating To From Malayan Banking Berhad Local currency counterparty credit rtgs BBB-/A-3 A-/A-2 Ratings Lowered and Remaining on Creditwatch Negative Rating To From Arab-Malaysian Merchant Bank Berhad Counterparty credit ratings B+/C BB/B Ratings Lowered RHB Bank Berhad Local currency counterparty credit rtgs BB+/Neg/B BBB/Neg/A-3 Foreign currency counterparty credit rtgs BB+/Neg/B BBB/Neg/A-3 Bank Bumiputra Malaysia Berhad Counterparty credit rating BBpi BBBpi Hong Leong Bank Berhad Counterparty credit rating Bpi BBpi Outstanding Ratings Affirmed Rating Malayan Banking Berhad Foreign currency counterparty credit ratings BBB-/Neg/A-3 Foreign currency CDs BBB-/A-3 US$250 million sub notes due 2005 BB+ US$300 million 3(A)2 commercial paper A-3 Public Bank Berhad Counterparty credit rating BBBpi Ban Hin Lee Bank Berhad Bank of Commerce (M) Berhad Multi-Purpose Bank Berhad Perwira Affin Bank Berhad Southern Bank Berhad Counterparty credit rating BBpi Sime Bank Berhad Counterparty credit rating CCCpi
SOURCE Standard & Poor's CreditWire
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