OREANDA-NEWS. Malayan Banking Berhad's (Maybank, A-/Negative) recently announced US-dollar denominated Basel III subordinated securities are the first offshore Basel III notes issued by a Malaysian bank. Until this point, issuances by banks have been in local currency where costs tend to be lower, aided by the depth of the local market. Fitch expects further offshore issuance to be mainly confined to banks with more sizeable regional balance sheets, while those that are domestically focused would likely continue to target issuance in local currency.

Overall capital levels for banks in Malaysia appear adequate, but requirements have risen globally amid greater regulatory scrutiny of banks. This has coincided with the need to replace legacy instruments, which will no longer qualify as capital under Basel III rules.

Fitch expects the terms and conditions for Malaysian Tier-2 securities to broadly follow those in this first offshore transaction. The securities carry a write-down clause linked to a non-viability trigger event, and are intended to qualify as Tier 2 capital under Malaysia's Basel III capital rules.

Under Fitch's criteria, the notes would be rated two notches below the banks' anchor ratings, which for Malaysian commercial banks would be their Viability Rating (VR). The two notches reflect the instruments' higher loss severity relative to senior unsecured instruments given their subordinated status. It also reflects Fitch's expectation of permanent full principal loss at the non-viability trigger event.

Like in many other banking systems, there is no numerical Point of Non-Viability (PONV) trigger in Malaysia. A non-viability event would occur when the relevant authorities - regulator Bank Negara Malaysia (BNM), jointly with the Malaysia Deposit Insurance Corporation (MDIC) - decide that a write-off or conversion into ordinary equity is necessary, or when a public capital injection or other equivalent support is to be provided, without which the bank would no longer be viable.

The contractual terms of Maybank's notes allow for a write-off to be either partial or in full. However, BNM currently stipulates that the amount written-off at PONV must be the full principal value of the instrument. The regulations also allow for the authorities not to require a write-off of the notes even if the bank is no longer viable, or when capital or other support has been provided. Given BNM's current directives, Fitch believes that if a write-down is required it would be in full rather than in part, which explains the two-notch differential from the anchor ratings.

Lastly, the agency would also not factor in support to Basel III Tier-2 securities issued by Malaysian commercial banks. This is Fitch's base case globally - and reflected in the notching from the VR. We believe the authorities still have a supportive attitude towards Malaysian banks, in particular the systemically important banks. However, we see incentives for providing support as stronger for senior creditors, particularly bank depositors, and state support would not extend to banks' Basel III loss-absorbing instruments.