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FINANCIAL INSTITUTIONS CREDIT OPINION 15 December 2017 Update RATINGS AmBank (M) Berhad Domicile Malaysia Long Term Debt Baa1 Type Senior Unsecured - Fgn Curr Outlook Stable Long Term Deposit Baa1 Type LT Bank Deposits - Fgn Curr Outlook Stable Please see the ratings section at the end of this report for more information. The ratings and outlook shown reflect information as of the publication date. Contacts Simon Chen +65.6398.8305 VP-Senior Analyst [email protected] Eugene Tarzimanov +65.6398.8329 VP-Sr Credit Officer [email protected] Jason Sin +65.6311.2603 Associate Analyst [email protected] Gene Fang +65.6398.8311 Associate Managing Director [email protected] AmBank (M) Berhad Update to credit analysis Summary AmBank (M) Berhad ’s (AmBank) Baa1 foreign-currency deposit rating incorporates its Baseline Credit Assessment (BCA) of baa3 and a two-notch uplift to reflect our assumption of support from the Government of Malaysia (A3 stable), if necessary. The baa3 BCA reflects AmBank's improved solvency position, particularly the bank's stronger capitalization profile and improved asset quality since 2011. The BCA also reflects AmBank's modest liquidity and funding profiles owing to its medium-sized franchise. AmBank's business mix is well diversified, and the bank holds a prominent position in lending to the domestic retail, and small and medium-sized enterprise (SME) segments, as well as to large Malaysian corporations. We assess the probability of support from the Malaysian government to AmBank to be very high based on the bank's entrenched, sizable market share and relative importance to the banking system. AmBank is part of AmBank Group and had total assets of MYR91.1 billion as of the end of September 2017. The bank accounted for 68% of the group's assets and 72% of the group’s profits after tax attributable to equity holders for the six months ended 30 September 2017. Exhibit 1 Financial profile key factors as of 30 September 2017 1.8% 12.1% 1.0% 11.3% 21.9% 0% 5% 10% 15% 20% 25% 30% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% Asset Risk: Problem Loans/ Gross Loans Capital: Tangible Common Equity/Risk-Weighted Assets Profitability: Net Income/ Tangible Assets Funding Structure: Market Funds/ Tangible Banking Assets Liquid Resources: Liquid Banking Assets/Tangible Banking Assets Solvency Factors (LHS) Liquidity Factors (RHS) AmBank (M) Berhad (BCA: baa3) Median baa3-rated banks Solvency Factors Liquidity Factors Source: Moody's Investors Service
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Page 1: AmBank (M) Berhad...FINANCIAL INSTITUTIONS CREDIT OPINION 15 December 2017 Update RATINGS AmBank (M) Berhad Domicile Malaysia Long Term Debt Baa1 Type Senior Unsecured - Fgn

FINANCIAL INSTITUTIONS

CREDIT OPINION15 December 2017

Update

RATINGS

AmBank (M) BerhadDomicile Malaysia

Long Term Debt Baa1

Type Senior Unsecured - FgnCurr

Outlook Stable

Long Term Deposit Baa1

Type LT Bank Deposits - FgnCurr

Outlook Stable

Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.

Contacts

Simon Chen +65.6398.8305VP-Senior [email protected]

Eugene Tarzimanov +65.6398.8329VP-Sr Credit [email protected]

Jason Sin +65.6311.2603Associate [email protected]

Gene Fang +65.6398.8311Associate [email protected]

AmBank (M) BerhadUpdate to credit analysis

SummaryAmBank (M) Berhad’s (AmBank) Baa1 foreign-currency deposit rating incorporates itsBaseline Credit Assessment (BCA) of baa3 and a two-notch uplift to reflect our assumptionof support from the Government of Malaysia (A3 stable), if necessary.

The baa3 BCA reflects AmBank's improved solvency position, particularly the bank's strongercapitalization profile and improved asset quality since 2011. The BCA also reflects AmBank'smodest liquidity and funding profiles owing to its medium-sized franchise.

AmBank's business mix is well diversified, and the bank holds a prominent position in lendingto the domestic retail, and small and medium-sized enterprise (SME) segments, as well as tolarge Malaysian corporations.

We assess the probability of support from the Malaysian government to AmBank to be veryhigh based on the bank's entrenched, sizable market share and relative importance to thebanking system.

AmBank is part of AmBank Group and had total assets of MYR91.1 billion as of the end ofSeptember 2017. The bank accounted for 68% of the group's assets and 72% of the group’sprofits after tax attributable to equity holders for the six months ended 30 September 2017.

Exhibit 1

Financial profile key factors as of 30 September 2017

1.8% 12.1%1.0%

11.3% 21.9%

0%

5%

10%

15%

20%

25%

30%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Asset Risk:Problem Loans/

Gross Loans

Capital:Tangible Common

Equity/Risk-WeightedAssets

Profitability:Net Income/

Tangible Assets

Funding Structure:Market Funds/

Tangible BankingAssets

Liquid Resources:Liquid BankingAssets/TangibleBanking Assets

Solvency Factors (LHS) Liquidity Factors (RHS)

AmBank (M) Berhad (BCA: baa3) Median baa3-rated banks

So

lve

ncy F

acto

rs

Liq

uid

ity F

acto

rs

Source: Moody's Investors Service

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MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Credit strengths

» Robust capital adequacy, which provides adequate buffers against unexpected credit losses

» Asset-quality improvements, driven by portfolio rebalancing and de-risking

Credit challenges

» Profitability impacted by lower asset yields from rebalancing efforts and normalizing of credit costs

» Modest funding franchise amid keen competition for low-cost deposits among companies in the industry

OutlookThe outlook on the bank’s ratings is stable, reflecting our expectation that its credit fundamentals will remain robust over the next12-18 months.

Factors that could lead to an upgradeAmBank’s long-term deposit and senior unsecured debt ratings could be upgraded if Malaysia’s A3 sovereign rating is upgraded,provided the bank maintains strong standalone financial metrics.

AmBank’s BCA of baa3 could be upgraded if the bank further improves its capital adequacy and funding profile while maintaining stableasset-quality metrics.

Factors that could lead to a downgradeAmBank's ratings could be downgraded if (1) the bank engages in aggressive organic expansion or acquisitions that significantly increaseits risk profile; (2) price competition among banks intensifies, resulting in a material decline in net income; or (3) the bank's operatingenvironment weakens significantly or it adopts less stringent underwriting practices, resulting in a deterioration in its asset quality andcapitalization profile.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 15 December 2017 AmBank (M) Berhad: Update to credit analysis

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MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Key indicators

Exhibit 2

AmBank (M) Berhad (Consolidated Financials) [1]9-172 3-172 3-162 3-152 3-142 CAGR/Avg.3

Total Assets (MYR million) 91,109 90,556 86,812 86,788 86,976 1.34

Total Assets (USD million) 21,577 20,462 22,251 23,434 26,635 -5.84

Tangible Common Equity (MYR million) 8,504 8,390 7,897 7,712 7,119 5.24

Tangible Common Equity (USD million) 2,014 1,896 2,024 2,082 2,180 -2.24

Problem Loans / Gross Loans (%) 1.8 1.9 1.8 1.6 2.1 1.85

Tangible Common Equity / Risk Weighted Assets (%) 12.1 12.0 11.8 11.3 10.0 11.46

Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) 12.3 13.0 12.3 10.9 15.0 12.75

Net Interest Margin (%) 1.8 1.8 1.9 2.3 2.5 2.15

PPI / Average RWA (%) 1.5 1.6 1.3 1.9 2.5 1.76

Net Income / Tangible Assets (%) 1.0 1.1 0.9 1.3 1.7 1.25

Cost / Income Ratio (%) 53.9 52.3 58.2 47.7 39.2 50.35

Market Funds / Tangible Banking Assets (%) 15.4 11.3 14.7 13.2 11.8 13.35

Liquid Banking Assets / Tangible Banking Assets (%) 19.9 21.9 23.5 23.5 23.1 22.45

Gross Loans / Due to Customers (%) 98.6 93.6 96.2 94.9 97.2 96.15

[1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel III - fully-loaded or transitional phase-in; IFRS [3] May include rounding differences due to scaleof reported amounts [4] Compound Annual Growth Rate (%) based on time period presented for the latest accounting regime [5] Simple average of periods presented for the latestaccounting regime. [6] Simple average of Basel III periods presentedSource: Moody's Financial Metrics

ProfileAmBank is wholly owned by AMMB Holdings Berhad, a holding company of a Malaysia-based universal banking group (AmBankGroup). AmBank is the commercial banking arm of AmBank Group.

AmBank Group provides a comprehensive range of financial products and services through its major subsidiaries, including AmBank,AmInvestment Bank Berhad, AmInvestment Group Berhad, AmGeneral Holdings Berhad and AmBank Islamic Berhad. The group'sbusiness divisions cover activities across retail banking, corporate and commercial banking, and investment banking, includingcustomised equity-linked solutions and stockbroking, markets, general insurance, life insurance and family takaful. These businessdivisions offer both conventional and Islamic financial services.

Detailed credit considerationsAsset quality stabilized owing to business portfolio rebalancing, although risks in the commercial real estate book remainAmBank's gross problem loan ratio was roughly stable at 1.8% as of the end of September 2017 from 1.9% as of the end of March2017 because new problem loan formation has remained fairly low over the period. Management highlighted that asset quality in theretail book (58% of total loans) is consistently improving, while the wholesale banking book (42%) is experiencing some stress in thecommercial real estate (CRE) sector.

As of the end of September 2017, 42% of the CRE loans were internally classified as being moderate or marginally substandard. Inaddition, CRE loans comprise about 8% of the group's total wholesale banking loan book. Hence, we are mindful that any significantcorrection to property prices could have an impact on the bank's asset quality.

Since May 2016, AmBank Group embarked on a strategic journey, which focused on building sustainable growth in four segments: massaffluent, affluent, medium-sized corporations and SMEs. As part of the rebalancing of its portfolio, the bank has rationalized growth inthe wholesale banking and auto finance businesses. Instead, it is targeting growth in the business banking and retail SME book.

As of the end of September 2017, the year-to-date loan growth in wholesale banking and auto finance was at -3%. Conversely, theyear-to-date loan growth in the business banking and retail SME book expanded by 14% and 50%, respectively, although from a lowbase.

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MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

The bank's retail loans are dominated by mortgages (around 30% of total loans) and auto loans (19%). The bank's retail loan asset-quality portfolio has remained resilient and continues to benefit from its portfolio-rebalancing efforts by targeting at preferredsegments.

AmBank identified the growing risks in its auto segment at an early stage and lowered its exposure by shrinking its auto loans by 20%since March 2013. The impaired loan ratio for the group's auto portfolio was 1.0% as of the end of March 2017, down from 1.3% as ofthe end of March 2016 and 1.7% as of the end of March 2015.

AmBank's impaired loan coverage ratio, measured by total impaired loan allowances as a percentage of gross impaired loans, was71.4% as of the end of September 2017, lower than the industry average of 81%. Including regulatory reserves, the bank's coverageratio rose to 101% from 85% as of March 2017, driven by a one-time transfer of retained earnings to regulatory reserves in the July-September quarter.

Similar to the other Malaysian banks that we rate, AmBank's credit concentration to its single-largest borrower is higher than its capitalbase. However, this situation has gradually improved. Moreover, the bank aims to further diversify its loan mix and focus on lending tocustomers of better credit quality, which will alleviate some of this concentration risk.

We have adjusted the bank's Asset Risk score to baa2 because we expect a modest increase in the impaired loan ratio based on the factthat the bank's real estate exposure and aggressive expansion into the SME sector may pose some downside asset-quality risks. This riskis, however, mitigated by declining net impaired loan slippages.

Robust capital adequacy, which provides adequate buffers against unexpected credit lossesAmBank’s capital adequacy remained robust as of the end of September 2017. The bank's Common Equity Tier 1 capital ratio (afterdeducting proposed dividends) of 11.39% was broadly in line with the 11.47% as of the end of March 2017.

We position the bank's Capital score at baa3 to reflect the stability in its capitalization profile. In addition, the bank’s robust capitalbuffer positions it well to withstand unexpected credit losses over the next 12-18 months.

Profitability pressures from loan rebalancing have somewhat stabilizedAmBank’s after-tax profit declined moderately by 1% to MYR473 million for the six months ended September 2017 from the year-earlier period, driven by a lower write-back of allowance for impairment on loans and advances.

Nevertheless, the bank's net interest income grew by 10% to MYR816 million for the six months ended September 2017 from theyear-earlier period. The net interest margin for the group widened to 1.99% on an annualized basis for the first half of the fiscal yearended 31 March 2018 (fiscal 2018) compared with 1.93% from the year-earlier period as a result of its portfolio rebalancing towardthe higher-yielding SME and retail loans, as well as increasing the share of lower-cost retail current and savings accounts (CASA) in itsdeposit mix.

AmBank’s cost-to-income ratio rose to 54% for the six months ended September 2017 from 52% the year-earlier period as a result ofincreased spending on rolling out new operations to support the business banking franchise.

As part of AmBank Group's strategic plan announced in May 2016, the group targets to derive around 50% of its income growth fromits growth segments, including wealth management, SME and medium-sized corporation customer segments. The group aspires to beamong the top four banks in Malaysia by 2020 in its preferred segments. So far, the group has made progress in several areas, includingrolling out its digital capabilities and enhancing cross-selling efforts.

The bank’s baa2 Profitability score reflects the continued pressure on its profitability from the ongoing portfolio-rebalancing efforts.

Modest funding franchise amid keen competition for low-cost deposits among companies in the industryAmBank’s deposit franchise remains smaller than that of the other larger Malaysian banks we rate, despite the bank's active efforts overthe past several years to grow its customer deposit base. Low-cost funding, such as current and savings accounts, constituted 20% ofAmBank's deposit base as of the end of September 2017, below the system average of 27%. The bank has been focusing on a number ofinitiatives to boost its current and savings account base, including acquiring payroll accounts and cash management services for SMEs,acquiring operating accounts within its merchant business and growing its base of mass affluent and affluent retail customers.

4 15 December 2017 AmBank (M) Berhad: Update to credit analysis

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MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

AmBank’s funding profile remains tight because of its smaller market access compared with that of its larger domestic peers. Weadjusted the bank's Funding Structure score to baa2 to reflect its relatively weak deposit franchise in Malaysia.

The bank's gross loan-to-deposit ratio was 94% as of the end of September 2017 and remained higher than the system loan-to-depositratio of 90% as of the same date. The bank complements its funding base with longer-term wholesale debt, which allows the bankto better match its longer-duration loan assets and be more selective in pursuing deposits in a highly competitive domestic depositmarket.

Management has also indicated that the bank maintains a comfortable liquidity coverage ratio under Basel III, which was introducedin Malaysia on 1 June 2015, with liquid assets on its balance sheet more than sufficient to cover its market-sensitive funds. Thisconsideration is reflected in the bank's Liquid Resources score of baa3.

AmBank's BCA is supported by the country's Strong- Macro ProfileMalaysia has been facing multiple external and domestic challenges. The following factors have all contributed to a weakening ofthe ringgit: (1) lower commodity prices; (2) increasing global risk aversion in expectation of interest rate hikes in the United States ofAmerica (Aaa stable); and (3) domestic uncertainties linked with the governance of 1Malaysia Development Berhad, a government-owned strategic development company, which added to the worsening sentiment toward Malaysia.

The weakening ringgit, coupled with the ongoing political controversy and the prospect of higher prices, has also dampened consumersentiment. While private consumption has been an important growth driver in recent years, we expect it to be a factor moderatingeconomic growth in coming years.

Our baseline scenario assumes Malaysia’s real GDP to grow 4.5%-4.6% in 2017-18, higher than 4.2% in 2016, reflecting ourexpectation that domestic economic activity will remain robust. However, the forecast GDP will remain lower than the 5% averagerecorded over the past decade. This relatively robust economic environment provides Malaysian banks with good growth opportunitiesand supports the debt repayment capacity of their borrowers.

Similar to other Malaysian banks, AmBank benefits from operating in a country that has a very high degree of economic andinstitutional strength, and bears moderate susceptibility to event risk.

Private-sector debt, particularly that of households, is high compared with GDP, but credit growth has been moderating in recentquarters, driven by the implementation of macro-prudential measures by Bank Negara Malaysia.

AmBank has almost all of its loans in Malaysia, a country to which we assign a Strong- Macro Profile.

Support and structural considerationsGovernment support considerationsWe assess the probability of systemic support from the Malaysian government to AmBank to be very high based on the bank'sentrenched, sizable market share and relative importance to the banking system. As a result, the bank's Baa1 deposit rating incorporatestwo notches of uplift from its BCA of baa3.

AmBank, a medium-sized domestic company, is part of Malaysia's eight core banking groups, after the industry consolidated from over50 lending institutions following the Asian financial crisis.

The bank exhibits a comparative strength in auto financing, with an 8% market share, as well as a 4% share of system loans anddeposits. AmBank Group has captured a 12% share of auto financing in Malaysia and a 6% share of system loans, as well as a 5% shareof system deposits.

Counterparty Risk (CR) AssessmentCR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails, and are distinct from debt and depositratings in that they (1) consider only the risk of default rather than both the likelihood of default and the expected financial loss suffered inthe event of default, and (2) apply to counterparty obligations and contractual commitments rather than debt or deposit instruments. TheCR Assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performance obligations (servicing),derivatives (for example, swaps), letters of credit, guarantees and liquidity facilities.

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MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

AmBank's CR Assessment is positioned at A3(cr)/Prime-2(cr)The CR Assessment, prior to government support, is positioned one notch above the Adjusted BCA of baa3 and, therefore, abovesenior unsecured and deposit ratings, reflecting our view that its probability of default is lower than that of senior unsecured debt anddeposits. We believe senior obligations represented by the CR Assessment will be more likely preserved to limit contagion, minimizelosses and avoid disruption of critical functions.

AmBank’s CR Assessment also benefits from two notches of systemic support, in line with our support assumptions on deposits andsenior unsecured debt. This approach reflects our view that any support provided by government authorities to a bank and that benefitssenior unsecured debt or deposits is very likely to benefit operating activities and obligations reflected by the CR Assessment as well,consistent with our belief that governments are likely to maintain such operations as a going concern to reduce contagion and preservea bank's critical functions.

Methodology and scorecardAbout Moody's Bank ScorecardOur scorecard is designed to capture, express and explain in summary form our Rating Committee's judgment. When read inconjunction with our research, a fulsome presentation of our judgment is expressed. As a result, the output of our scorecardmay materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strongdivergence). The scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down toreflect conditions specific to each rated entity.

6 15 December 2017 AmBank (M) Berhad: Update to credit analysis

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MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Rating methodology and scorecard factors

Exhibit 3

AmBank (M) BerhadMacro FactorsWeighted Macro Profile Strong - 100%

Factor HistoricRatio

MacroAdjusted

Score

CreditTrend

Assigned Score Key driver #1 Key driver #2

SolvencyAsset RiskProblem Loans / Gross Loans 1.8% a3 ← → baa2 Expected trend Sector concentration

CapitalTCE / RWA 12.1% baa2 ← → baa3 Risk-weighted

capitalisationProfitabilityNet Income / Tangible Assets 1.0% baa2 ← → baa2 Expected trend

Combined Solvency Score baa1 baa2LiquidityFunding StructureMarket Funds / Tangible Banking Assets 11.3% a3 ← → baa2 Deposit quality

Liquid ResourcesLiquid Banking Assets / Tangible Banking Assets 21.9% baa3 ← → baa3 Stock of liquid assets

Combined Liquidity Score baa1 baa2Financial Profile baa2

Business Diversification 0Opacity and Complexity 0Corporate Behavior 0

Total Qualitative Adjustments 0Sovereign or Affiliate constraint: A3Scorecard Calculated BCA range baa1-baa3Assigned BCA baa3Affiliate Support notching 0Adjusted BCA baa3

Instrument class Loss GivenFailure notching

AdditionalNotching

Preliminary RatingAssessment

GovernmentSupport notching

Local CurrencyRating

ForeignCurrency

RatingCounterparty Risk Assessment 1 0 baa2 (cr) 2 A3 (cr) --Deposits 0 0 baa3 2 -- Baa1Senior unsecured bank debt 0 0 baa3 2 -- Baa1Source: Moody's Financial Metrics

Ratings

Exhibit 4Category Moody's RatingAMBANK (M) BERHAD

Outlook StableBank Deposits Baa1/P-2Baseline Credit Assessment baa3Adjusted Baseline Credit Assessment baa3Counterparty Risk Assessment A3(cr)/P-2(cr)Senior Unsecured Baa1

Source: Moody's Investors Service

7 15 December 2017 AmBank (M) Berhad: Update to credit analysis

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MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

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Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’sOverseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a NationallyRecognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by anentity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registeredwith the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.

MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferredstock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it feesranging from JPY200,000 to approximately JPY350,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

REPORT NUMBER 1103452

8 15 December 2017 AmBank (M) Berhad: Update to credit analysis

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MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Contacts

Simon Chen +65.6398.8305VP-Senior [email protected]

Eugene Tarzimanov +65.6398.8329VP-Sr Credit [email protected]

Jason Sin +65.6311.2603Associate [email protected]

Gene Fang +65.6398.8311Associate [email protected]

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454

9 15 December 2017 AmBank (M) Berhad: Update to credit analysis


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