Moody upgrades RHB’s financial strength rating to Positive

Net interest margin improvement, more comfortable loan-to-deposit ratio, healthier capital adequacy, and management stability boosted ratings.

Moody's Investors Service on Monday has changed its outlook for the D Bank Financial Strength Rating ("BFSR") of RHB Bank Berhad ("RHBB") to Positive from Stable. RHBB's A3/P-1 foreign currency deposit ratings were affirmed with a stable outlook, according to a Moody's report.

The outlook for the BFSR was revised to positive because of (1) the notable decline in funding costs and a corresponding improvement in net interest margins (NIM); (2) a more comfortable loan-to-deposit ratio; (3) healthier capital adequacy; and (4) the relative stability of its management and coherence of its strategy in recent years. Funding costs were down due to the conversion of expensive, irredeemable non-cumulative preference shares (INCPS) of RM1.37 billion to ordinary shares in 2008.

"RHBB's improved funding profile, amid better than expected local economic conditions, enhances prospects for NIM, a key earnings driver," says John Tham, a Moody's VP/Senior Credit Officer.

The bank's loans are also now more comfortably funded by stable customer deposits. RHBB's loan-to-deposit ratio was 85% in 2009, compared to about 100% in 2006.

Indeed, these factors have benefited the bank's capital formation, enabling RHBB to lower its dependence on costly hybrid capital securities.

Furthermore, a relatively stable management -- as compared to the many changes in the years before and after the Asia financial crisis -- support continuity of the bank's strategies.

"Although the recent issuance of innovative Tier 1 capital securities in RHBB's RM600 million program will raise funding costs in the future, they are still likely to be lower than before because the amount issued is lower than the INCPS," adds Tham.

Moreover, the average coupon of the recent IT1 issued is lower than the INCPS dividend rate.

Moody's understands that further issuance of such hybrid capital is unlikely, given the stricter capital guidelines being considered in the aftermath of the global financial crisis.

Still, there will be challenges to improving profitability. Firstly, competitive pressure and industry consolidation could impact RHBB's competitive position. Secondly, fluid global conditions could indirectly affect the local economy and weaken asset quality and increase the need for further provisions.

RHBB's asset quality is generally weaker than that of its peers. The bank's NPL ratio rose to 4.7% in 2009 from 4.4% in 2008. NPL reserve coverage also fell to 83.4%, from 90.6% over the same period. On a more positive note, RHBB's improving capital position mitigates some of the risk.

Factors that could result in an upgrade of RHBB's BFSR over the next 12 to 18 months include (1) further evidence that its current level of NIM can be sustained to enhance earnings; (2) significantly lower NPLs and higher reserve coverage; and (3) continued maintenance of its Tier 1 capital adequacy ratio above 10%.

The last rating action on RHBB was taken on July 20, 2009, when its A3/P-1 foreign currency deposit ratings were confirmed following the adjustment of the systemic support assumption used in Moody's Joint-Default Analysis (JDA).