MARC has upgraded the short-term rating to MARC-1 and the long-term rating to A+ in respect of Hong Leong Credit’s (HLC) commercial papers and medium term notes programme. This reflects the improved fundamentals of HLC’s key subsidiaries as well as the improved capital structure of the company. The rating is moderated by the competitive financial services environment and the potential limitations on dividend upstreaming to HLC.

In an effort to become a pure financial services group, HLC underwent a capital distribution of its 49.0% owned Hong Leong Properties Bhd (HLP) shares to its shareholders in July 2003, with the residual HLP shares held after the exercise disposed off in August 2003, making HLC Group a largely financial services holding company. With this, HLC Group is involved mainly in banking and finance, insurance, stock and share brokerage and asset management.

HLC actively provides strategic direction to its subsidiaries in terms of business growth and profitability as well as dividend planning. The HLC Group posted an aggregate revenue of RM2,654.0 million in FY 2005, 4.5% higher than the previous year, on improved contributions from the insurance and banking businesses. With the group’s overall higher profit margin and lower loan loss provisioning, group pre-tax profit correspondingly increased by 12.4% year-on-year to RM808.2 million.

As a holding company, the primary cash generation avenue of HLC is from dividend receipts as well as the income received from investments. The company’s core cash flow interest coverage lowered slightly during the year to 10.8 times, owing to the special dividends received in the previous year from its banking business.

HLC company’s debt-equity ratio in the past four years has been declining steadily. HLC’s shareholders’ funds increased by 2.2% to RM1,650.2 million, thus maintaining the debt-equity ratio to 0.3 times whilst the issuance of USD 110 million certificates of deposits by HLB increased the group-wide debt-equity ratio up to 0.2 times (FY2004: 0.1). HLC’s double leverage ratio[1] also hovered around 1.2 times in FY 2005 as it did in FY 2004.

HLC’s consolidated revenue and pre-tax profit is predominantly contributed by its banking arm, which hovered at 80.0% of HLC Group’s revenue since FY 1999. Going forward, MARC anticipates revenue from the banking segment to remain under pressure, in light of market competition; whilst the securities business continues to face earnings volatility with the direction of interest rates, volume and share prices on Bursa Malaysia as the major variables affecting performance. As for the insurance segment, MARC expects the continued strengthening of the franchise to underpin stable contributions to the Group.