Fitch affirms Hong Leong at BBB+

Places EON on positive watch as rating company takes into account HLB's planned $2.18bln EON takeover.

Fitch Ratings on Monday has affirmed Hong Leong Bank Berhad's (HLB) Long-term foreign currency Issuer Default Rating (IDR) at 'BBB+' with a Stable Outlook, and placed HLB's Support rating on Rating Watch Positive (RWP). Concurrently, the agency has also placed all EON Bank's ratings on RWP. A full list of the ratings and rating actions follows at the end of this Fitch release.

The rating actions take into account HLB's proposed MYR5.06 billion (S$2.18 billion) offer to acquire all the assets and liabilities of EON Capital (EON Cap), the investment holding company of EON Bank. However, Fitch recognises the continued uncertainty over the completion of this proposed acquisition at this juncture, including the recent legal suit filed by EON Capital's largest shareholder (Primus Pacific - a private equity fund) against certain shareholders and directors of EON Cap. Although the deadline of HLB's all-cash offer for EON Cap is due to expire on 15 August 2010, it is possible that this tussle may become more protracted, or that the proposed transaction may simply collapse. Fitch has taken both possibilities into consideration while taking the aforementioned rating actions; nevertheless, the agency would likely review HLB and EON Bank's ratings again once there is greater clarity on the outcome of the proposed acquisition offer and/or the pending legal suit.

Notwithstanding the above uncertainty, the affirmation of HLB's IDR and other ratings, with the exception of the Support Rating, reflects the current robust financial profile of HLB including its good asset quality track record and solid capital position, which will likely remain adequate even after the potential acquisition of assets and liabilities of EON Capital. Although this proposed acquisition, if successful, will exert considerable downward pressure on HLB's capital ratios, Fitch expects the bank's capital restorative measures - particularly its plans to raise fresh equity through a MYR1.6 billion ($499.68 million) rights issue - should mitigate such impact and replenish HLB's capital ratios to levels comparable to its larger domestic banking peers. In addition, HLB's plans to raise an additional MYR1.8 billion ($562.16 billion) in other forms of qualifying capital securities should in combination, help maintain its Tier 1 and Total CAR ratios at a minimum of 10% and 12%, respectively. As mentioned earlier, the fund raising plan is contingent upon the successful outcome in the proposed acquistion of assets and liabilities of EON Cap.

Fitch notes that the potential acquisition will bring greater diversity into HLB's income profile, even though it is mildly negative from a capital or funding standpoint - factors that are already reflected in HLB's exisiting ratings. Furthermore, should the proposed acquisition be successful, HLB will become the fourth-largest bank in Malaysia with higher systemic importance. Hence, the agency expects a higher propensity of state support which is reflected in the RWP status on HLB's Support rating.

In the event that this proposed acquisition does not materalise, HLB's financial profile would remain substantially unchanged as it was before its bid for EON Capital, and therefore its credit ratings would also remain the same.

Meanwhile, the proposed acquisition will have positive credit implications for EON Bank, which has a slightly weaker credit profile and is the main investment of EON Capital. This is reflected in the Positive Watch the agency placed on all EON Bank's ratings. However, if the proposed deal were to fail, EON Bank's ratings would likely revert to Stable Outlook, as there is virtually no downside to its ratings irrespective of the outcome of this transaction. The agency expects to resolve the Positive Watch on these ratings once there is greater clarity over the outcome of HLB's proposed acquisition offer.

The detailed list of the ratings and rating actions are as follows:

Hong Leong Bank

• Long-term foreign currency IDR affirmed at 'BBB+' with a Stable Outlook;
• Short-term foreign currency IDR affirmed at 'F2';
• Individual rating affirmed at 'C';
• Support rating: '3' on RWP;
• Support Rating Floor: 'BB+' on RWP;
• Rating on USD subordinated debt affirmed at 'BBB';
• Rating on long-term deposits affirmed at 'A-'.

EON Bank

• Long-term foreign currency IDR: 'BBB-' on RWP
• Short-term foreign currency IDR: 'F3' on RWP;
• Individual rating: 'C/D' on RWP;
• Support rating: '3' on RWP;
• Support Rating Floor: 'BB' on RWP;
• Rating on long-term deposits: 'BBB' on RWP.