KUALA LUMPUR (March 12): Moody's Investors Service has affirmed AmBank (M) Bhd's (AmBank) A3 long-term foreign currency deposit rating and AmBank's baa2 Baseline Credit Assessment (BCA), but revised its rating outlook to negative from stable, following its 1Malaysia Development Bhd (1MDB) settlement.

In a statement, Moody's said the rating action follows AMMB Holdings Bhd's (AmBank Group) RM2.83 billion settlement with the government of Malaysia in relation to its involvement with 1MDB.

"The affirmation of AmBank's A3 rating incorporates Moody's assessment of a very high likelihood of support from the government of Malaysia in times of need.

"This results in a two-notch uplift from the bank's baa2 BCA, based on AmBank Group's systemic importance as the sixth-largest banking group in Malaysia by assets, with AmBank as the group's main operating entity," it said.

Moody's also said the negative outlook reflects uncertainty over AmBank's ability to restore its capitalisation to pre-settlement levels over the next 12-18 months.

"AmBank will absorb the bulk of the large settlement at a time when it is facing a slowdown in its internal capital generation due to rising credit costs.

"The recovery in its capitalisation will depend on AmBank Group's divestitures, the timing of which is uncertain, and regulatory approval for its plans to implement risk-weighted asset optimisation via the foundation internal rating based approach in April 2022," it said.

However, it said, the reduction in AmBank's capital will be partly offset by an immediate equity injection from AmBank Group, as the group plans to maintain AmBank's common equity tier 1 (CET1) above an internal threshold of 10.5%.

As a result, AmBank's proforma CET1 ratio will fall to 11.0% from 13.1% as of Dec 31, 2020, it said.

Moody's also said the settlement will not materially affect AmBank's liquidity. "In addition to the capital injection from AmBank Group, AmBank is planning to issue Tier 2 bonds that will largely offset the related cash outflow," it noted.

Moody's further said today's rating action reflects the impact of AmBank Group's due diligence lapses in 1MDB-related capital market transactions that occurred more than a decade ago.

In addition to more traditional areas of risk management, Moody's said it considers due diligence and other non-financial risks an important part of effective governance.

"However, since 2015, a new board and management team have been appointed, and the group has undertaken a number of corrective measures to strengthen its internal processes, including a remediation programme overseen by the local regulator.

"The settlement will also clear the group of any further claims from the Malaysian government and its agencies," it noted.

Since the settlement announcement on Feb 26, followed by a two-day trading suspension that the group requested, AmBank Group's shares touched a low of RM2.69 after sinking 47 sen or 14.87%. The stock subsequently rebounded. Today, it closed at RM3.06 — up five sen or 1.66% from the day before, valuing the company at RM8.7 billion.