- Summary of international agencies’ ratings. Fitch Ratings Inc (Fitch) has been widely reported to be reviewing the country‟s rating soon. Fitch currently has a credit rating of A-, with a Negative outlook, for Malaysia. Standard & Poor‟s Ratings Services (S&P) currently has a credit rating of A-, with a Stable outlook, for Malaysia. Moody‟s Investors Services (Moody‟s) currently rates Malaysia„s sovereign debt at A3 with a Positive outlook. A summary of the classification of the different investable grades for sovereign papers is shown in the following page. Under Fitch‟s current A- ranking, the classification is considered to be Upper Medium Grade. The next notch down is considered to be Lower Medium Grade.

- Difference in spreads between the different rankings. According to the Wikipedia website, a study indicated that the additional interest rate or “spread” that corporate bonds pay over that of “riskless” US Treasury bonds was 43bps for an AAA rated bond, compared to more than 4% for a CCC-rated bond.

- Average bps spread between A and BBB/Baa2 rating. The website also highlighted that an A rating‟s average spread is 99bps while a BBB or a Baa2 rating average spread is 166bps (see table in following page).

- Difference in default rates. Wikipedia also said that one study by Moody's claimed that over a 5-year time horizon, bonds that it gave its highest rating (Aaa) had a cumulative default rate of just 0.18%, the next highest (Aa2) had 0.28%, the next (Baa2) had 2.11%, 8.82% for the next (Ba2), and 31.24% for the lowest it studied (B2).

- MGS yields remained stable in recent weeks. The 10-year MGS yield was relatively stable, having inched up to 4.13% in mid-June 2015 before falling back to 4.02% currently. Therefore, there was not much changes from the 3.91% level in end- May 2015 and 3.852% in end-April 2015. The most recent high recorded before this was 4.148% in end-December 2014, which was attributed to volatility in oil price. The 10-year MGS yield was about 3.50% two years ago.

- Potential impact likely on NIM, and/or non-interest income. In terms of impact to banking stocks, we think that a potential one-notch downgrade by Fitch is within expectations. Nevertheless, we are likely to review our NIM assumption for the banking sector as a whole given the generally more competitive deposit landscape in recent times. The other possible direct impact is on marked-to-market unrealised position of securities papers, which are held by the banks, but so far, there are no signs of volatility in MGS yield in recent months. We maintain NEUTRAL on the banking sector.

Source: AmeSecurities Research - 23 Jun 2015