OREANDA-NEWS. Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (LT IDRs) of Malayan Banking Berhad (Maybank) and Export Import Bank of Malaysia Berhad (MEXIM) at 'A-', and upgraded the LT IDR of Hong Leong Bank Berhad (HLBB) to 'A-' from 'BBB+'. The ratings are on Stable Outlook.

A full list of rating actions is at the end of this rating action commentary.

Fitch expects slower economic conditions in Malaysia and other key Asian markets to persist over the next one to two years amid weak external demand and low commodity prices. We believe asset-quality risks will continue to build in such an environment, although the extent of deterioration in the Malaysian banks' credit portfolios will depend on their respective sector and regional exposures.

The Outlook on Maybank's ratings has been revised to Stable from Negative, reflecting Fitch's view that accommodative policy measures over the last several months should help cushion slowing economic growth in Malaysia and Maybank's other key markets, and more stable financial markets have reduced the uncertainty to the bank's overall credit profile relative to a year ago. Asset-quality pressures remain, but are more adequately counterbalanced by Maybank's loss-absorption capacity in the form of an improved capital buffer, as well as its healthy core earnings generation and sound access to capital.

KEY RATING DRIVERS

IDRs AND VIABILITY RATINGS (VRs) - MAYBANK AND HLBB

Maybank's IDRs and Viability Rating (VR) reflect its market-leading franchise in Malaysia, reasonably stable asset quality backed by a robust risk framework, diversified earnings sources, disciplined funding and liquidity management as well as improved capital buffers. The banking group's Fitch Core Capital (FCC) ratio improved to 14.6% at end-March 2016 from 12.9% at end-March 2015 (fully-loaded CET1 ratio end-March 2016: 12.4%; end-March 2015: 10.6%) due to continued capital retention through solid earnings and the bank's ongoing dividend reinvestment scheme.

Maybank's gross impaired loan ratio rose to 2.1% at end-March 2016 (end-2014: 1.5%) in large part due to deterioration in its offshore exposures in Indonesia, Singapore and Greater China. Loan-loss coverage fell to around 70% of impaired loans (end-2014: 96%) concurrently. We see continued asset-quality risks amid sluggish regional growth, but believe that such risks are likely to remain manageable for the bank in light of its stable and diverse revenue base, adequate risk controls and strengthened capitalisation.

The upgrade of HLBB's IDRs and VR reflects its strengthened capitalisation, as well as its long-standing prudent risk appetite, sound asset-quality track record, and stable funding and liquidity profile. The bank's gross impaired-loan ratio remained low at 0.8% at end-March 2016, and loan-loss provisions of 127% of impaired loans provided further protection against potential credit slippage. Importantly, the bank's FCC ratio strengthened to 15.0% at end-March 2016 from 12.7% at end-June 2015 following a MYR3bn rights issue in December 2015.

The Stable Outlook on HLBB's ratings reflects Fitch's view that its existing strengths are likely to be preserved in the medium term, despite the domestic economic challenges.

SUPPORT RATINGS (SRs) AND SUPPORT RATING FLOORS (SRFs) - MAYBANK AND HLBB

Maybank's and HLBB's SRs and SRFs reflect Fitch's expectation of a high probability of sovereign support for both banks, if needed.

Fitch believes that Maybank is of extremely high domestic systemic importance given its large local deposit base (around 18% of Malaysia system-wide deposits) and indirect state ownership through various state-owned funds. This drives the bank's SR of '2' and SRF of 'BBB'.

HLBB's SR of '2' and SRF of 'BBB-' reflect its systemic importance as the fifth-largest local bank, accounting for around 9% of system-wide deposits.

DEBT RATINGS - MAYBANK AND HLBB

The senior notes of Maybank and HLBB are rated at the same level as the banks' respective IDRs. This is because the notes constitute direct, unconditional and unsecured obligations of the banks, and rank equally with all their other unsecured and unsubordinated obligations.

Maybank's legacy Basel II-compliant subordinated notes are rated one notch below the VR, reflecting their subordinated status relative to claims from senior unsecured creditors, and the absence of any going-concern loss-absorption mechanism.

Maybank's Basel II-compliant hybrid securities are rated four notches below the VR, to reflect the deep subordination status of the securities and the presence of going-concern loss-absorption mechanisms, but also look-back provisions in the optional dividend deferral.

IDR, SUPPORT RATING, SUPPORT RATING FLOOR AND SENIOR DEBT - MEXIM

MEXIM's Support Rating of '1' reflects Fitch's view that there is an extremely high probability of sovereign support for the policy bank. This premise also drives MEXIM's Support Rating Floor and LT IDR of 'A-', which are equalised with the LT IDR of the Malaysian sovereign. MEXIM's senior debt is rated at the same level as its IDR, reflecting their senior unsecured status.

MEXIM is a development financial institution with a specific mandate to finance and support Malaysian export and import activities and overseas projects. Fitch's extremely high expectation of sovereign support for the bank is derived from its unique policy role, the Malaysian sovereign's full ownership of the bank largely through the Minister of Finance, Inc. and past instances of support for the bank through capital injections and government funding facilities.

MEXIM is small in relation to Malaysia's GDP and its domestic banking system, suggesting that the sovereign is likely to be able to support the bank if needed.

RATING SENSITIVITIES

IDRs AND VIABILITY RATINGS (VRs) - MAYBANK AND HLBB

The ratings on Maybank and HLBB are unlikely to be upgraded in the near term, as their LT IDRs are already at the same level as that of Malaysian sovereign and in light of today's upgrade of HLBB.

Negative rating action may occur if recent improvements in the banks' capital positions are not maintained, or if their risk appetites increase significantly - such as through excessive loan growth and mergers and acquisitions - with no corresponding increase in loss-absorption buffers. The banks' rating profiles would also come under pressure if the economic cycle were to worsen materially, to an extent that asset quality and earnings significantly deteriorate and the banks' capitalisation, funding or liquidity positions weaken.

SUPPORT RATINGS (SRS) AND SUPPORT RATING FLOORS (SRFS) - MAYBANK AND HLBB

The SRs and SRFs of Maybank and HLBB are sensitive to any change in the sovereign's ability or propensity to provide extraordinary support to the banks. This could arise from a change in the sovereign ratings or the introduction of senior debt bail-in requirements in line with developments in other jurisdictions globally, although Fitch views the latter to be less likely for the Malaysian banks in the near term.

DEBT RATINGS - MAYBANK AND HLBB

The ratings on the banks' senior notes are sensitive to changes in their respective IDRs, while the ratings on Maybank's Basel II subordinated notes and hybrid securities are dependent on changes in the bank's VR.

IDR, SR, SRF AND SENIOR DEBT - MEXIM

MEXIM's ratings are sensitive to perceived changes in the sovereign's ability or willingness to provide support to the bank. The ratings should move in tandem with the sovereign's ratings, barring any reassessment of the sovereign's propensity to support the bank.

MEXIM's ratings may also be notched downwards from the sovereign's if Fitch believes that the sovereign's propensity to support the bank has diminished. This may occur with a reduction of its policy role or a decrease in the sovereign's stake in the bank. However, we do not view such scenarios as likely in the near to medium term.

The rating actions are as follows:

Maybank

- Long-Term Foreign-Currency IDR affirmed at 'A-'; Outlook Revised to Stable from Negative

- Short-Term Foreign-Currency IDR affirmed at 'F2'

- Long-Term Local-Currency IDR affirmed at 'A-'; Outlook Revised to Stable from Negative

- Viability Rating affirmed at 'a-'

- Support Rating affirmed at '2'

- Support Rating Floor affirmed at 'BBB'

- Senior notes affirmed at 'A-'

- Basel II-compliant subordinated notes affirmed at 'BBB+'

- Basel II-compliant hybrid Tier 1 securities affirmed at 'BB+'

HLBB

- Long-Term Foreign-Currency IDR upgraded to 'A-' from 'BBB+'; Outlook Stable

- Short-Term Foreign-Currency IDR affirmed at 'F2'

- Viability Rating upgraded to 'a-' from 'bbb+'

- Support Rating affirmed at '2'

- Support Rating Floor affirmed at 'BBB-'

- Senior debt upgraded to 'A-' from 'BBB+'

MEXIM

- Long-Term Foreign-Currency IDR affirmed at 'A-'; Outlook Stable

- Support Rating affirmed at '1'

- Support Rating Floor affirmed at 'A-'

- Senior debt affirmed at 'A-'