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Rating Action:

Moody's changes RHB Bank's A3 debt and deposit ratings outlook to positive

10 Oct 2014

Rating action follows merger announcement with CIMB

Singapore, October 10, 2014 -- Moody's Investors Service has affirmed RHB Bank Berhad's A3 deposit and debt ratings, and the bank's D+ bank financial strength rating, and changed the outlook on the A3 ratings to positive, following the announced agreement between RHB Capital Berhad (unrated; parent to RHB Bank), CIMB Group Holdings Berhad (CIMB Group; A3 stable) and Malaysia Building Society Berhad (MBSB; unrated) to merge all three entities.

The ratings assigned to Moody's-rated CIMB entities involved in the transaction remain unchanged. These entities include CIMB Group, CIMB Bank Berhad (A3 stable(m)) and CIMB Islamic Bank Berhad (A3 stable(m)).

On 9 October 2014, CIMB Group announced that the three parties agreed in-principle to the key terms for the proposed merger, and an application was made to Bank Negara Malaysia to seek its approval. The parties expect to finalize the transaction around mid-2015.

The merger will involve a share swap between RHB Capital and the shareholders of CIMB Group. CIMB Group's assets and liabilities will be assumed by RHB Capital.

While the specific post-merger organizational structure remains unclear, based on the banks' managements' statements on their strategic objectives for entering into the merger, Moody's considers that the most likely scenario is an outright merger between RHB Bank and CIMB Bank.

The rating actions on RHB Bank reflect the likely positive credit implications it will derive from its position within a larger and stronger financial group, including increased systemic importance and consequently, a higher probability of government support.

As for the ratings of the CIMB entities involved in the transaction, details around how the transaction will be executed and what ultimate structure will emerge are insufficient at this stage to reach a conclusion on whether the merger will have any credit impact.

RATINGS RATIONALE

RATIONALE BEHIND THE AFFIRMATION AND POSITIVE OUTLOOK ON RHB BANK'S RATINGS

The positive outlook on RHB Bank's A3 debt and deposit ratings is driven by the likely positive credit implication that the bank will derive from its merger into a larger, more diversified, and financially stronger financial group.

Moody's considers it likely that RHB Bank and CIMB Bank will merge, based on statements from the banks' management teams on the business objectives of the deal. However, even if both entities continue to operate as sister entities, RHB Bank should reap benefits from access to CIMB Bank's much larger client base and distribution network.

Once the merger is finalised, RHB Bank's creditworthiness will benefit from a very high probability of parental support from the merged group and/or CIMB Bank, based on RHB Bank's strategic importance and size within the merged group.

According to Moody's, RHB Bank will also benefit from a higher probability of support from the Malaysian government (A3 positive), because it will become part of the largest financial group in Malaysia, once the three-party merger is completed.

RATINGS FOR CIMB ENTITIES REMAIN UNCHANGED

The ratings of CIMB Group, CIMB Bank and CIMB Islamic Bank remain unchanged, largely because the details around how the transaction will be executed and what ultimate structure will emerge are insufficient at this stage to conclude as to whether or not the merger will have any credit impact.

As for the merged entity (RHB Capital, the surviving holding company), its pro-forma common equity Tier 1 (CET1) ratio will likely fall to around 9% after the transaction, due to goodwill from RHB Bank, from the 9.5% for CIMB Group as of 30 June 2014.

The impact on the CET1 ratio is not significant because the merger will be done through a share swap. The merged group's double leverage ratio will likely rise, because of the higher double leverage ratio for RHB Capital compared to that for CIMB Group.

For CIMB Bank, the possible merger with RHB Bank will likely provide additional cost synergies that will take time to materialize. Moody's notes that the broader impact on the financial profile of CIMB Bank will depend on the structure of its acquisition — if any — of RHB Bank.

Moody's notes that the risks could be more pronounced for the standalone financial profile of CIMB Islamic Bank, which will triple in asset size by acquiring the Islamic business of RHB Bank and MBSB. Before CIMB Islamic Bank reaps the benefits of its much larger asset base, it could be exposed to MBSB's weaker asset quality, as well as a heavier cost base arising from the likely transfer of personnel and branches to the Islamic banking entity, from the conventional banking entities.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Moody's would consider upgrading RHB Bank's A3 ratings if the Malaysian sovereign's A3 rating is upgraded. Conversely, Moody's would change the outlook to stable if the transaction with CIMB is derailed.

RHB Bank's ba1 baseline credit assessment (BCA) could be raised if the bank reduces its impaired loans ratio to below 2% of gross loans, and strengthens its net income/average risk-weighted asset ratio such that it exceeds 2.1%. Moody's could lower the bank's BCA if its asset quality and CET1 ratio sharply deteriorate, and if its funding and liquidity profiles weaken.

LIST OF AFFECTED RATINGS

RHB Bank Berhad

- Foreign currency deposit ratings: A3/P-2 affirmed, outlook changed to positive

- Foreign currency senior unsecured: A3 affirmed, outlook changed to positive

- Foreign currency senior unsecured medium-term notes (MTN Programme): (P)A3/(P)P-2 affirmed

- Bank financial strength rating (BFSR): D+, affirmed with stable outlook. The BFSR maps to ba1 BCA.

The principal methodology used in this rating was Global Banks published in July 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in Kuala Lumpur, RHB Bank Berhad reported total consolidated assets of MYR190 billion ($59 billion) as of 30 June 2014.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Eugene Tarzimanov
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Stephen Long
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's changes RHB Bank's A3 debt and deposit ratings outlook to positive
No Related Data.
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