Fitch Ratings has affirmed
Key Rating Drivers
Standalone Profile Drives Ratings: HLBB's Long-Term IDR is driven by its VR, which is underpinned by the bank's lower-risk business model and prudent risk profile. This has allowed HLBB to consistently maintain the strongest asset quality among Fitch-rated Malaysian banks. Its risk profile leads us to assess the VR above the implied VR.
Operating Environment Recovers:
Focus on Domestic Retail Lending: The bank primarily targets the domestic household sector, with over 65% of loans directed to individuals and about 94% based in
Solid Underwriting Standards: The risk profile of 'bbb+' is a notch higher than the business profile score, as we believe HLBB's underwriting standards are stronger than the industry average. This is evident by its impaired loans ratio consistently being one of the lowest among major bank peers, at below 1% for the past seven years.
Stable Asset Quality: Repayments by HLBB's borrowers post-moratorium have been encouraging. The impaired loans ratio has been stable at around 0.5% in recent quarters, even after local loan relief programmes wound down at end-2021. We expect the core metric ratio to rise marginally as more loans exit relief, but believe there is adequate headroom within the asset quality score of 'bbb+' to absorb moderate deterioration.
Higher Profitability: We expect the recent rise in interest rates to widen HLBB's net interest margin and augment its revenue alongside higher fee income. Steady increases in operating expenses and benign credit costs due to ample loan-loss reserves will also aid profitability. We have affirmed the earnings and profitability score at 'bbb' with a stable outlook.
Satisfactory Capital Against Risk Profile: HLBB's capital and leverage score of 'bbb' is assigned above its 'bb' category implied score. This is based on its latest reported common equity Tier 1 (CET1) ratio of 12.7% as of
Generally Stable Funding and Liquidity: The loan/deposit ratio (LDR) stood at 84.2% at
Solid Government Support: The GSR reflects our view of a high probability of state support, if needed. HLBB is not a named domestic systemically important bank, but it is of moderate systemic importance, with around a 9% share of industry deposits.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
IDRs and VR
HLBB's IDR and VR could come under pressure if its loan portfolio deteriorates or performs substantially below our projections, leading to weaker profitability and significant capital impairment. This could include scenarios where:
the operating profit/risk-weighted assets profitability core metric falls to below 2% for an extended period (
the CET1 ratio stays noticeably below 13% (
GSR
A decline in the state's ability or propensity to provide extraordinary support to HLBB could lead to a downgrade. This could arise from a downgrade of the sovereign 'BBB+' rating, HLBB's considerably diminished systemic importance or the introduction of senior debt bail-in requirements as part of recovery and resolution planning regulatory developments.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
IDR and VR
HLBB's IDRs are at the same level as those of the sovereign. Its rating is unlikely to be upgraded unless both the sovereign rating is upgraded and
The Short-Term IDR may be upgraded to 'F1' if the bank's funding and liquidity score is at least 'a', but the prospects of this is remote, as such a score would be two notches above the sovereign rating.
GSR
The GSR may be upgraded if we perceive HLBB's systemic importance to have increased significantly. This may be reflected in, for example, a substantial increase in its deposit market share, such that it is designated as a domestic systemically important bank in the top occupied bucket. We consider such prospects to be low in the near term, given the significant gap in market share between HLBB and the extant domestic systemically important banks.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
The ratings on HLBB's senior debt programme represent its unsecured and unsubordinated obligations and are equalised with its Long-Term IDR, consistent with Fitch's Bank Rating Criteria, as
The Short-Term IDR was affirmed at 'F2', which is the higher of the two options available for a 'BBB+' Long-Term IDR, as its funding and liquidity profile is strong enough to warrant the higher option, in accordance with Fitch's criteria.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
The senior debt programme ratings in sensitive to movements in the IDR.
The Short-Term IDR will be downgraded to 'F3' if the Long-Term IDR is downgraded to 'BBB' and the funding and liquidity score is simultaneously lowered to 'bbb' or below. The prospects of upgrading the Short-Term IDR to 'F1' is remote, as it would entail revising the bank's funding and liquidity score to at least 'a', which is two notches above the sovereign rating.
VR ADJUSTMENTS
The VR has been assigned above the implied VR due to the following adjustment reason: risk profile (positive)
The capital and leverage score of 'bbb' has been assigned above the 'bb' category implied score due to the following adjustment reason: risk profile and business model (positive).
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
HLBB's GSR is linked to the Malaysian sovereign rating.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visitwww.fitchratings.com/esg
(C) 2022 Electronic News Publishing, source