1 Credit Opinion: AmBank (M) Berhad Global Credit Research - 21 Jan 2016 Kuala Lumpur, Malaysia Ratings Category Moody's Rating Outlook Stable Bank Deposits Baa1/P-2 Baseline Credit Assessment baa3 Adjusted Baseline Credit Assessment baa3 Counterparty Risk Assessment A3(cr)/P-2(cr) Senior Unsecured Baa1 AMBB Capital (L) Ltd BACKED Pref. Stock Non-cumulative Ba3 (hyb) Contacts Analyst Phone Simon Chen/Singapore Eugene Tarzimanov/Singapore Stephen Long/Hong Kong Dan Pek/Singapore Key Indicators AmBank (M) Berhad (Consolidated Financials) 9-15 3-15 3-14 3-13 3-12 Avg. Total Assets (MYR million) Total Assets (USD million) 87, , , , ,862.6 2.1 19, , , , ,395.5 -6.8 Tangible Common Equity (MYR million) 7, , , , ,788.7 7.9 1,889.6  2.1 Tangible Common Equity (USD million) Problem Loans / Gross Loans (%) 1, , , , Tangible Common Equity / Risk Weighted Assets (%) Problem Loans / (Tangible Common Equity + Loan Loss  15.4 Reserve) (%) Net Interest Margin (%) PPI / Average RWA (%)    42.8 Market Funds / Tangible Banking Assets (%) 14.2 Net Income / Tangible Assets (%) Cost / Income Ratio (%) Liquid Banking Assets / Tangible Banking Assets (%) 24.9 Gross loans / Due to customers (%) 97.1 Source: Moody's  All figures and ratios are adjusted using Moody's standard adjustments  Basel III - fully-loaded or transitional phase-in; LOCAL GAAP  Basel II; LOCAL GAAP  Compound Annual Growth Rate based on LOCAL GAAP reporting periods  LOCAL GAAP reporting periods have been used for average calculation  Basel III - fullyloaded or transitional phase-in & LOCAL GAAP reporting periods have been used for average calculation Opinion
2 SUMMARY RATING RATIONALE On 11 January 2016, we affirmed AmBank (M) Berhad's (AmBank) foreign currency deposit and senior unsecured debt ratings at Baa1 and revised the rating outlook to stable from positive. The rating action follow the affirmation of Malaysia's A3 sovereign rating, and the change in the outlook for Malaysia's rating to stable from positive on 11 January AmBank's Baa1 foreign currency deposit rating is driven by its BCA of baa3, and incorporates two notches of uplift to reflect our assumption of support from the Malaysian government (A3, stable). The rating also takes into account the introduction of our new bank rating methodology, including our basic Loss Given Default analysis, where creditors are not presumed to absorb losses, since no operational resolution regime is in place. The baa3 BCA reflects AmBank's improved solvency position, particularly its stronger capitalization profile and improving asset quality since The BCA also reflects its lower profitability relative to its domestic peers, and modest liquidity and funding profiles, due to its midsize franchise. The bank's business mix is fairly diversified, and it holds a prominent position in lending to the domestic retail and small-and medium-sized enterprise segments, as well as to large Malaysian corporations. We assess the probability of support from the Malaysian government (A3 stable) to AmBank to be very high, based on the bank's entrenched, sizeable market share, and relative importance to the banking system. AmBank is part of AMMB Holdings Berhad (unrated), an investment holding company with total assets of MYR133.4 billon at 30 September AmBank accounted for 66% of AMMB's assets and 68% of profit after tax attributable to equity holders of AMMB during the six-month period from 1 April 2015 to 30 September Rating Drivers - Generally good asset quality - Good capital adequacy and stable profitability - Modest funding franchise; pressured liquidity metrics, due to a high loan-to-deposit ratio (LDR) Rating Outlook The outlook on the bank's deposit and senior unsecured debt ratings is stable. What Could Change the Rating - Up AmBank's long-term deposit and senior unsecured debt ratings could be upgraded if Malaysia's A3 sovereign rating is upgraded, but even then, only if the bank maintains strong standalone financial metrics. The preferred stock rating will be upgraded or downgraded if the bank's Adjusted BCA is upgraded or downgraded. AmBank's BCA of baa3, could be raised if the bank further improves its capital adequacy and funding profile, while maintaining stable asset quality metrics. What Could Change the Rating - Down AmBank's ratings could be downgraded if: (1) it engages in aggressive organic expansion or acquisitions that significantly raise its risk profile; (2) price competition among banks becomes intense, resulting in a material decline in net income; (3) its operating environment weakens significantly or the bank adopts less stringent underwriting practices, resulting in a deterioration in its asset quality and capitalization profile. AmBank's BCA could be lowered if the bank materially raises its exposure to borrowers in countries that we consider of higher risk than Malaysia (A3stable). DETAILED RATING CONSIDERATIONS GENERALLY GOOD ASSET QUALITY
3 AmBank's impaired loans ratio rose slightly to 1.8% in September 2015 from 1.6% in March This was largely driven by a single corporate real-estate related loan which was subsequently settled in November We expect that the asset quality metrics of Malaysian banks will deteriorate mildly over the next months, because higher interest rates will result in retail borrowers exhibiting lower debt serviceability, especially given the high household leverage in Malaysia. Additionally the ongoing ringgit volatility and depressed commodity prices will pressure corporate debt repayment ability. We adjusted the bank's Asset Risk score to baa2 to reflect this negative trend. Loans to households made up 54% of gross loans at September 2015, and were dominated by mortgages (around 46% of household loans) and car loans (37%). We note that the bank identified the growing risks in its auto segment at an early stage, and lowered its exposure by shrinking its car loan book by 21% during the 18 months to September The impaired loans ratio for the auto portfolio was 1.7% at September 2015 (March 2015: 1.7%) down from a high of 2.6% at March The quality of AmBank's mortgage book has improved, with impaired loans at 2.1% as of September 2015, compared to 2.4% as of March However, the quality of AmBank's mortgage book remains weaker than the Malaysian average, because of the bank's larger share of loans with elevated loan-to-value (LTV) ratios. We note that some of AmBank's high-ltv mortgages were originated before 2006 and distort its overall LTV ratio. AmBank's impaired loans are adequately provided for. Its impaired loan coverage -- measured by total impairment allowances as a percentage of gross impaired loans -- stood at 100.4% at 30 September As with other Moody's-rated Malaysian banks, AmBank's credit concentration to its single largest borrower is high relative to its capital base, but this situation has gradually improved. Moreover, the bank aims to further diversify its loan mix and to focus on lending to customers of better credit quality, which will alleviate some of this concentration risk. GOOD CAPITAL ADEQUACY AND STABLE PROFITABILITY AmBank's capital adequacy was good at September Its CET1 ratio (after deducting proposed dividends) of 10.7% was slightly higher than the 10.6% seen in March We position the bank's Capital score at ba1 to reflect this sustained trend in its capitalization profile. The bank's capital buffer positions it well to withstand unexpected credit losses over the next months. Its total capital adequacy ratio was at 15.8% at September 2015, above the 8.0% minimum required under local regulation. For the six-month periods to September 2015, the bank's after-tax profit fell by 6% year-on-year to MYR491.4 million, depressed by pressured net interest margins and weaker fixed income trading. The bank has benefited from its strategy of optimizing business growth, with a focus on profitability and credit quality. For its for its risk underwriting, governance and product innovation - AmBank has leveraged the expertise and international connectivity of its major shareholder, Australia and New Zealand Banking Group Ltd. (ANZ, deposits Aa2 stable, BCA a1), to support its growth. ANZ owns 23.8% of AmBank's shares. Overall, we expect that AmBank's profitability will remain relatively stable over the next months, as wider margins -- due to higher interest rates -- will offset the increase in the cost of risk. We adjusted the bank's Profitability score to baa3 to reflect this expected trend. MODEST FUNDING FRANCHISE; PRESSURED LIQUIDITY METRICS, DUE TO A HIGH LDR The bank's deposit franchise is small when compared to other Moody's-rated banks in Malaysia, despite its active efforts over the past several years to grow its customer deposit base. Low cost funding -- such as current and saving accounts -- constitute only a small portion of its deposit base. More importantly, its funding profile remains tight, because of its weaker market access when compared to its larger domestic peers. We adjusted the bank's Funding Structure score to baa1 to reflect its relatively weak
4 deposit franchise in Malaysia. The bank's gross LDR remained stable at 96% at end September 2015, slightly above the level at end March 2015 and higher than most of its domestic peers. According to management, the bank maintains an adjusted LDR of around 90%, which also includes non-callable term wholesale debt on top of customer deposits. This strategy has allowed AmBank to be selective in pursuing deposits in a highly competitive and increasingly expensive deposit market. Management has also indicated that the bank maintains a comfortable liquidity coverage ratio (LCR) under Basel III; which was introduced in Malaysia on 1 June Indeed, the bank maintains an adequate amount of liquid assets on its balance sheet, which more than cover its market-sensitive funds. This consideration is reflected in its adjusted Liquid Resources score of baa3. AMBANK'S BCA IS SUPPORTED BY ITS STRONG- MACRO PROFILE Malaysia has been facing multiple external and domestic challenges. The following factors have all contributed to a weakening of the ringgit over the past year: (1) lower commodity prices; (2) increasing global risk aversion in anticipation of slower growth in China (Aa3, stable) and interest rate hikes in the US (Aaa stable); and (3) domestic uncertainties linked to the governance of 1Malaysia Development Berhad (1MDB, unrated) that added to the worsening sentiment towards Malaysia. The weakening ringgit, coupled with heightened political tension and the prospects of higher prices, has also dampened consumer sentiment. While private consumption has been an important growth driver in recent years, we expect that it will be a factor moderating economic growth in coming years. We estimate that the country's GDP grew by 4.8% in 2015 and will weaken to 4.4% in This relatively robust economic environment provides Malaysian banks with good growth opportunities and supports the debt repayment capacity of their borrowers. Similar to other Malaysian banks, AmBank benefits from operating in a country with a very high degree of economic strength, a high degree of institutional strength and moderate susceptibility to event risk. Private sector debt particularly that of households is high relative to GDP, but we note that credit growth has been moderating in recent quarters, driven by the implementation of macro-prudential measures from the regulator. AmBank has almost all of its loans in Malaysia, a country to which we assign a Strong- macro profile. Notching Considerations GOVERNMENT SUPPORT We assess the probability of systemic support from the Malaysian government to AmBank to be very high, based on the bank's entrenched, sizeable market share and relative importance to the banking system. As a result, the bank's Baa1 deposit rating incorporates two notches of uplift from its BCA of baa3. AmBank, a midsize domestic player, is part of Malaysia's eight core banking groups, after the industry consolidated from over 50 lending institutions, following the Asian financial crisis. The bank exhibits a comparative strength in auto financing, with a 7% market share, as well as a 4.1% share of system loans and a 3.7% share of system deposits. AmBank Group has captured a 13% share of auto financing in Malaysia and a 6.1% share of system loans, as well as a 5.4% share of system deposits. COUNTERPARTY RISK (CR) ASSESSMENT The CR Assessment of A3(cr) for AmBank is in line with Malaysia's sovereign rating of A3, and reflects the bank's Adjusted BCA of baa3, as well as our assessment of very high government support for the bank in times of need. CR assessments are opinions of how a bank's counterparty obligations such as covered bonds, contractual performance obligations (servicing), derivatives (e.g., swaps), letters of credit, guarantees and liquidity facilities, are likely to be treated if a bank fails, and are distinct from debt and deposit ratings in that they: (1) consider only the risk of default rather than expected loss; and (2) apply to counterparty obligations and contractual commitments rather than debt or deposit instruments. The CR Assessment, prior to government support, is positioned one notch above the Adjusted BCA of baa3 and
5 therefore above senior unsecured and deposit ratings, reflecting our view that its probability of default is lower than that of senior unsecured debt and deposits. We believe senior obligations represented by the CRA will be more likely preserved to limit contagion, minimize losses and avoid disruption of critical functions. AmBank's CR Assessment also benefits from two notches of systemic support, in line with our support assumptions on deposits and senior unsecured debt. This approach reflects our view that any support provided by government authorities to a bank, and which benefits senior unsecured debt or deposits is very likely to benefit operating activities and obligations reflected by the CR Assessment as well, consistent with our belief that governments are likely to maintain such operations as a going-concern to reduce contagion and preserve a bank's critical functions. Rating Factors AmBank (M) Berhad Macro Factors Weighted Macro Profile Strong - Financial Profile Factor Historic Ratio Macro Adjusted Score Solvency Asset Risk Problem Loans / Gross Loans Credit Trend Assigned Score Key driver #1 1.9% a3 baa2 Sector concentration Capital TCE / RWA 11.1% baa3 ba1 Risk-weighted capitalisation Profitability Net Income / Tangible Assets Combined Solvency Score Liquidity Funding Structure Market Funds / Tangible Banking Assets Liquid Resources Liquid Banking Assets / Tangible Banking Assets 1.1% baa2 baa3 Expected trend baa2 baa3 13.1% a3 baa1 Deposit quality 25.1% baa2 baa3 Stock of liquid assets Combined Liquidity Score baa1 baa2 Financial Profile baa3 Qualitative Adjustments Adjustment Business Diversification 0 Opacity and Complexity 0 Corporate Behavior 0 Total Qualitative Adjustments 0 Key driver #2 Sovereign or Affiliate constraint A3
6 Scorecard Calculated BCA range baa2 - ba1 Assigned BCA baa3 Affiliate Support notching 0 Adjusted BCA baa3 Instrument Class Loss Given Failure notching Additional notching Preliminary Rating Assessment Government Support notching Local Currency rating Foreign Currency rating Deposits 0 0 baa3 2 Baa1 Senior unsecured bank 0 0 baa3 2 Baa1 debt This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history Moody s Corporation, Moody s Investors Service, Inc., Moody s Analytics, Inc. and/or their licensors and affiliates (collectively, MOODY S ). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGS AFFILIATES ( MIS ) ARE MOODY S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY S ( MOODY S PUBLICATIONS ) MAY INCLUDE MOODY S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY S OPINIONS INCLUDED IN MOODY S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY S ANALYTICS, INC. CREDIT RATINGS AND MOODY S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE. MOODY S CREDIT RATINGS AND MOODY S PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS FOR RETAIL INVESTORS TO CONSIDER MOODY S CREDIT RATINGS OR MOODY S PUBLICATIONS IN MAKING ANY INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED,
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