MARC has assigned its long-term and short-term financial institution ratings of AA-/MARC-1 on KAF Investment Bank Berhad (KAF Investment). The assigned ratings reflect the bank’s low-risk business model, established track record in Malaysia as well as its strong capitalisation and healthy asset quality. The outlook on the ratings is stable.

Largely focused on trading in money market and debt securities in the secondary market and mobilising short-term wholesale funds for investment in securities, KAF Investment is one of the largest investment banks in Malaysia based on asset size, with assets of RM8.0 billion as at end-February 2010. The bank is majority owned by its founder and managing director, Datuk Khatijah Ahmad, through an 80% stake in KAF Investment’s ultimate holding company, AKKA Sdn Bhd. Institutional shareholder Permodalan Nasional Berhad holds 33.05% of the bank through its immediate holding company, KAF Securities Sdn Bhd.

KAF Investment’s focus on low-risk short-term money market activities reflects its origins as a discount house. Given the nature of KAF Investment’s business model, investor, counterparty and customer confidence are critical to its funding and earnings generation, especially in less favourable market conditions. KAF Investment’s historically restrained appetite for credit and market risks as well as its solid track record in money market operations have allowed the investment bank to maintain and build confidence with key stakeholders through economic cycles. Lending activities undertaken by KAF Investment have been mostly limited to providing bridging loans for companies pending the completion of fundraising exercises. The bank’s market share in other investment banking areas such as equity and debt capital market activities has traditionally been small.

KAF Investment has demonstrated sound earnings performance during past capital market downturns. MARC notes that the bank has been able to outperform many of its investment bank peers who are more reliant on corporate finance activity, which tends to be more volatile. From a risk adjusted return on asset perspective, KAF Investment continues to show good profitability. The bank’s net profits surged more than twofold to RM87.8 million for the financial year ended May 31, 2009 (FY2009) from RM38.9 million a year ago, thanks to the gain from the disposal of fixed income securities (FY2009: RM33.3 million; FY2008: loss of RM6.3 million), which increased in value following the 150bps reduction in overnight policy rates (OPR) by Bank Negara Malaysia (BNM). In addition, the bank’s newly commenced foreign currency trading operation and its success in securing capital market deals further boosted the bank’s income. The bank remained profitable into the first three quarters of FY2010 (9MFY2010), driven by improved interest margins on the back of stable interest yield from fixed income securities holdings (which were partly purchased prior to the decline in OPR) and lower funding cost. Consequently, annualised ROA and ROE rose to historical highs of 1.83% and 14.86% respectively in 9MFY2010.

KAF Investment’s regulatory capital adequacy ratio of 66.1% at end-9MFY2010, which was much higher than the industry average of 31.7%, is particularly noteworthy. The strong capitalisation level to a great extent is attributed to the bank’s high equity base as well as its balance sheet composition of largely low risk-weighted assets. The bank follows a strict security selection guideline, investing only in high quality fixed income securities, including Malaysian Government Securities and highly-rated private debt securities which are mostly rated AA- and above. 
 
Although the likely increases in interest rates are expected to exert pressure on the bank’s profit margins, its balanced portfolio with durations ranging from less than one year to more than five years is expected to partly mitigate the negative impact. MARC also believes that the bank’s asset liquidity and balance sheet are well adapted to the higher funding volatility it faces as a wholesale-funded bank. The stable outlook on the ratings reflects MARC’s expectation that the bank will maintain strong financial fundamentals, including its risk adjusted profitability, liquidity and capital position, while maintaining its favourable asset quality in the near-to-medium term.

Contacts:
Lim Kok Seng +603-2090 2272 / kokseng@marc.com.my;
Anandakumar Jegarasasingam +603-2090 2250/ kumar@marc.com.my