Business, Economic & Finance: U.K. Government announces financial support package to banks, ratings of Malaysian subsidiaries unaffected

[Article from RAM: 15 October 2008]

Amid the intensified disruption in global financial markets recently, the UK Government announced a proposal to provide support for its banking system on 8 October 2008. The proposal involves coordinated efforts between the UK Treasury and the Bank of England, with a three-pronged objective of ensuring sufficient short-term liquidity, medium-term funding and longer-term capital to the banking system.

“Ultimately, these measures have been designed to put the banking system on a stronger footing, and in turn bolstering confidence as well as supporting the broader economy under the currently difficult operating environment,” says Promod Dass, RAM Ratings’ Head of Financial Institution Ratings.

“We have been evaluating the impact of the global financial crisis on the parents of locally-incorporated foreign banks, since they have an international presence and may be affected, whether directly or indirectly,” he adds.

In RAM Ratings’ portfolio, 3 locally-incorporated foreign banks are part of these UK-domiciled banking groups, including HSBC Bank Malaysia Berhad (AAA/P1/stable), Standard Chartered Bank Malaysia Berhad (AAA/P1/stable), and The Royal Bank of Scotland Berhad (AA2/P1/stable, formerly known as ABN AMRO Bank Berhad). We rigorously examine the capital strength, asset quality, management capability, earnings robustness, as well as funding and liquidity position of any bank in deriving its credit rating. Specifically for locally-incorporated foreign banks, we also factor in the role of the parent as part of the assessment; however, the emphasis on the parent bank may vary depending on several factors which include the Malaysian subsidiaries’ local footprint, fundamentals and level of interaction with their parent.

As HSBC and Standard Chartered have significant presence in Malaysia with strong fundamentals, the ratings of these locally-incorporated foreign banks rely more on the local operations. The Malaysian subsidiaries of HSBC and Standard Chartered have solid local banking franchise and performance track record. For RBS Berhad, greater consideration is given to the financial and operational support, as well as franchise from its parent bank, given its smaller footprint in Malaysia on a relative basis.

The relief package provides the UK-based banking groups instant access to capital funds, allowing them to strengthen their capital positions amid a challenging business landscape. As at 30 June 2008, HSBC and Standard Chartered have Tier 1 capital ratios of 8.8% and 8.5%, respectively. In this regard, we view the two banks to be adequately capitalised. Both HSBC and Standard Chartered have indicated that they do not have current plans to utilise the UK Government’s recapitalisation initiatives. On 9 October 2008, HSBC had injected £750 million into its UK banking subsidiary, which was funded from the Group’s own resources, to further strengthen its capital position.

RBS announced an offer to raise £15 billion in ordinary shares which will be underwritten by the UK Government. In addition, the UK Government will further subscribe for £5 billion of preference shares to be issued by RBS. The UK Government’s financial relief measures will bolster RBS’s capital position and strengthen its financial profile; RBS reported pre-tax losses of £691 million in the first half of fiscal 2008, following £5.9 billion of credit-market write-downs during the period. While the UK Government’s support aims to stabilise and rebuild the British banking system, we note that it does not intend to be a permanent shareholder of the recapitalised banks.

“All ratings on locally-incorporated foreign banks in our portfolio are intact,” adds Dass.

Media contact
Promod Dass
(603) 7628 1790
promod@ram.com.my