Bank mergers set to improve credit

Bank mergers set to improve credit

KUALA LUMPUR (AFP): International rating agency Standard and Poor's said yesterday the anticipated increase in mergers among Malaysian banks over the next three years will benefit their credit quality.

The agency has assigned credit ratings to nine Malaysian banks, including state-owned Bank Bumiputra Malaysia Bhd. and Public Bank Bhd., the country's second and third largest after Maybank in terms of assets.

Mergers and acquisitions are expected to increase among local banks as they seek to gain critical mass and Tier-One status, said Standard and Poor's analyst Nick Wade.

Tier One banks are those that have met the central bank's requirement for a minimum paid-up capital of 500 million ringgit (US$200 million) and are allowed to undertake a wide range of banking activities.

"Thus, in the medium to long term, the mergers should be beneficial to the credit standing of Malaysian banks," Wade said in a statement.

The anticipated mergers in the local banking industry was triggered by the merger between DCB Holdings Bhd. and Kwong Yik Bank Bhd. last November to form the country's second largest bank.

Given the expectation for a favorable economy, "doom and gloom appear to be out of place" for Malaysian banks, Wade said.

"Banks are also taking advantage of beneficial operating environment by building healthy buffers in the form of capital and general provisions to assist them in weathering the fiercest of financial storms," he said.

"The profit outlook remains encouraging despite the expected impact on margins from increased competition," Wade added.

The agency projects loan growth to continue to rise with focus on the manufacturing, infrastructure, property and consumer credit sectors. Loan growth rose to 28 percent in 1995 from 15 percent previously.

Standard and Poor's assigned an "A" rating to Public Bank based on its strong market position, strong funding base and high capital ratios but said it must prudently manage rapid growth and regional expansion.

The agency gave a "BBB" rating to Bank Bumiputra based on the government's support but said the bank's problem loans remain above the industry average and it faces many challenges to regain market share.

Bank of Commerce (M) Bhd., the country's fifth largest in terms of assets, was assigned a "BBB" rating based on its improved earnings and sound capitalization.

"Constraints on the rating include uncertainties of erratic balance-sheet growth, residual high non-performing loans and lack of non-bank business diversity," the agency said.

Standard and Poor's also assigned a "BBB" rating to Perwira Affin Bank Bhd. and a "BB" rating to Southern Bank Bhd., Multi- Purpose Bank Bhd., Hong Leong Bank Bhd., Ban Hin Lee Bank Bhd. and Sime Bank Bhd.

Based on interest payment and repayment of principal, "A" rated entities have strong capacity, "BBB" entities adequate capacity while "BB" entities are regarded as having predominantly speculative characteristics.

The ratings were made based on public disclosure of bank information and other sources and do not involve analytical dialogues with the nine banks, the agency said.