MARC has affirmed the ratings of Hong Leong Financial Group Berhad’s (HLFG) RM300 million commercial papers and medium term notes (CP/MTN) facilities at A+/MARC-1 with a positive outlook. The ratings encompass the shared credit profile of HLFG’s operating subsidiaries, established banking and insurance franchises of core subsidiaries, as well as the sound capital position of the company and conservative management practices. The rating is moderated by the competitive financial services environment and current and future capital needs that will be needed to support business growth.

In mid-2006, HLFG (formerly known as Hong Leong Credit Berhad) assumed its present name, so as to better reflect its status as a diversified financial services holding company catering to individual and business customers. This was in conjunction with a rebranding exercise to communicate the group’s customer and marketplace focus.

For FY2006, the HLFG Group achieved a growth of 11.4% in its revenue base and profit before tax increased by 7.3%, spurred on by net interest income and non-interest income (including income from Islamic banking) growth of 6.3% and 18.4% respectively. Based on nine months ended March 2007 results, the group reported a pre-tax profit of RM662.7 million with the group’s banking arm, Hong Leong Bank Berhad (HLB), contributing to 92.8% of total pre-tax profit. As an investment holding company, dividends upstreamed by subsidiaries of HLFG, primarily HLB and Hong Leong Assurance Berhad (HLA), constitute the main sources of operating cash flow for debt and interest payments.

HLB is the group’s major profit contributor and is likely to remain so in the near to intermediate term. Residential property loans, which dominate 35.4% of HLB Group’s gross loan portfolio, continue to be the key driver of loans growth for HLB. In FY2006, HLB Group managed to net a 7.1% increase in pre-tax profit, driven by interest income on the back of a narrowing net interest margin. The bank’s good asset quality is reflected in a relatively low level of non-performing loans (NPL). HLB’s net NPL ratio has decreased to 3.4% as at FYE2006. Going forward, the loan book of HLB will largely be influenced by consumer fundamentals in light of its high ratio of consumer lending to corporate lending. Notwithstanding, non-interest income, driven by fee-based activities would see an increase as over the past few years, HLB has been actively building up its wholesale banking division. Also, as part of an enlarged financial services group, cross-sell opportunities provide an important means to grow organically and strengthen the bank’s revenue base.

In FY2006, HLA, the group’s composite insurer, managed to sustain its revenue above the RM1 billion threshold. However, HLA’s net profit for FY2006 suffered a drop of 5.7% and 2.1% at company and group level respectively, as a result of lower investment income and lower surplus transfer from general insurance. HLA’s products are mainly distributed through its agency channel while products sold through bancassurance are predominantly sold through HLB. The latter mainly bundles its housing loans with HLA’s MRTA, which contributed to 32.9% of total new annualized business premiums in the life division

in FY2006. The predominance of new single premium business generally implies higher potential volatility in income. In the general division, HLA continues to be one of the leading fire insurers in the industry. However, the general division has exhibited weaker earnings performance over the years as reflected in the downward trend in surplus transfer.

HLFG company’s debt-equity ratio in the past five years has been declining steadily with shareholders’ funds increasing to RM1.7 billion as at March 2007, maintaining the debt-equity ratio at 0.24 times. HLFG’s double leverage ratio[1] stands around 1.2 times. Over time, it is expected that HLFG will continue to issue debt to fund the business growth of its core subsidiaries in amounts consistent with maintaining HLFG’s debt ratings.

The positive outlook reflects positive earning trends at HLFG, as seen in the recently announced results for the nine month period ended March 31, 2007 results. Pre-tax profit increased by 11.4% compared to the preceding year’s corresponding period. Continuing momentum in earnings growth, profitability measures and leverage improvements could lead to higher ratings in the near to intermediate term.