- Moody’s Investor Service (Moody’s) has concluded its rating review of Malaysian banks. Moody recently announced that it has concluded its rating reviews on nine Malaysian financial institutions.

- This follows Moody’s new bank rating methodology which was first published in March 2015. Moody’s said its reviews on the ratings of nine Malaysian institutions were initiated on 18 March 2015, following publication of Moody’s new bank rating methodology. Press reports highlighted that Moody’s had announced rating actions that affected 1,021 out of 1,934 rated banking entities, including operating banks, holding companies, subsidiaries, special purpose issuance conduits, branches and other entities for which Moody’s had assigned ratings to at least one debt class.

- Local currency bank deposit ratings were reconfigured to be more consistent with country rating. Moody’s said that as a result of the implementation of the new bank rating methodology, in particular the change in Moody’s view that the capacity for government support is best reflected by the government’s bond rating (which is A3 for Malaysia), Moody’s has lowered the local currency bank deposit ratings of Malaysian banks that were previously positioned above Malaysia’s A3 government rating. In particular, Moody’s has downgraded the local currency deposit ratings of Malayan Banking Bhd (Maybank), Public Bank Bhd (PBB), CIMB Bank Bhd (CIMB Bank) and CIMB Islamic Bank Berhad (CIMB Islamic Bank) to A3 from A2. There ratings are now positioned at Malaysia’s sovereign rating level and have a positive outlook, in line with the positive outlook on the government bond rating.

- The change in methodology was well communicated ahead. We understand that the change in methodology was well communicated to the banks, given that the new methodology was published earlier. Thus, the news release did not pose a major surprise to the banking industry. The banks also do not foresee any changes to cost of deposit insurance, as the local Perbadanan Insurans Deposit Malaysia (PIDM) (government agency set up in 2005 to administer the Deposit Insurance System) has its own in-house methodology in terms of ratings.

- Our take. We believe any impact is likely to be in terms of the ability to compete for deposit, as other banks such as foreignowned banks – i.e. Stanchart, OCBC, and UOB – are not affected by the change in deposit rating; for example, they may be able to compete better for deposits at lower rates. This is mitigated to some extent by the PIDM scheme, which provides deposit insurance of up to RM250,000 per depositor per member bank. The other possible impact is on cost of funds if there is a need to raise foreign currency debt, which we believe relies on ratings by all three major agencies, i.e. Moody’s, Standard & Poor Financial Services LLC (Standard and Poor), and Fitch Ratings Inc. We maintain NEUTRAL on the banking sector.

Source: AmeSecurities Research - 18 Jun 2015