S&P Downgrades Five Malaysian Banks; Outlook Negative

Sep 25, 1998, 01:00 ET from Standard & Poor's CreditWire

    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
     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
     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.
     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
                                                 To            From
     Malayan Banking Berhad
      Local currency counterparty credit rtgs    BBB-/A-3      A-/A-2
             Ratings Lowered and Remaining on Creditwatch Negative
                                                 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
     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