RHB restructuring proactive given changing regulatory environment

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KUCHING: RAM Rating Services Bhd (RAM) views RHB Capital Bhd’s recently announced proposed corporate restructuring as a proactive move in light of the impending changes in Bank Negara Malaysia’s (BNM) regulations.

The BNM discussion paper, Capital Adequacy Framework for Financial Holding Companies (Banking Groups) – issued last October – requires financial holding companies (FHCs) to have minimum capital-adequacy requirements, similar to banks.

The proposed BNM framework aims to ensure that FHCs are adequately capitalised to support their group-wide risks, address the multiple gearing of capital and excessive leverage within the respective financial groups, and achieve greater consistency in the disclosed capital ratios among financial groups headed by banks and FHCs.

“While there is no regulatory arbitrage on capital recognition under FHCs or banks under the proposed regulation, capital securities issued by FHCs are, nevertheless, typically rated lower than those issued by banks.

“This is due to structural subordination from a rating perspective, which may increase the cost of capital,” explains Sophia Lee, RAM’s co-head of Financial Institution Ratings.

The recent announcement by RHB Capital, which would lead to RHB Bank Berhad (rated AA2/Stable/P1) rising to the apex of the banking group instead of RHB Capital, will be more capital-efficient and eliminate double leverage.

Additionally, the RM2.5 billion of fresh capital that will be infused into the new RHB banking group is expected to raise its common-equity tier-1 ratio to above 11 per cent, putting it at par with those of its peers, which range from 11 to 12 per cent.

The operations and business profile of the entire group are expected to remain unchanged after the exercise.

As part of its corporate manoeuvre, RHB Capital will be repaying all of its outstanding debts including the RM600 million under its RM1.1 billion CP/MTN Programme (2009/2016) (rated A1/Positive/P1).

It will also be cancelling its RM150 million CP/MTN Programme (2008/2015) (rated A1/Positive/P1) which has no outstanding amount owed in June 2015. The completion of the proposed corporate restructuring, subject to relevant regulatory approvals, is targeted to be completed by end-2015.