MARC has assigned ratings of MARC-1/A+ with a positive outlook to Hong Leong Financial Group Berhad’s (HLFG) proposed RM800 million commercial papers and medium term notes (CP/MTN) facilities. The ratings hinge largely on the strong credit profile of HLFG’s core subsidiaries, Hong Leong Bank Berhad (HLB) and Hong Leong Assurance Berhad (HLA), and on their continued ability to upstream dividends for HLFG’s debt and interest payments.

The established banking and insurance franchises of the group’s core subsidiaries, as well as the sound capital position of the company and conservative management practices are encompassed in the current ratings. Moderating the ratings is the competitive financial services environment and the additional capital needed to support business growth.

In FY2006, HLFG Group’s revenue grew 11.4% while profit before tax increased 7.3%, spurred by net interest income and non-interest income (including income from Islamic banking) growth of 6.3% and 18.4% respectively. For the nine months ended March 2007, the group reported a pre-tax profit of RM662.7 million, dominated by the 92.8% contribution from the group’s banking arm, HLB.

HLB is likely to maintain its status as the group’s major profit contributor in the near to intermediate term. Residential property loans, which comprise the largest share of HLB Group’s gross loan portfolio with a 35.4% share, continue to be the key driver of loans growth for HLB. The bank has a relatively low level of net non-performing loans (NPL) of 2.3% as at March 2007. Going forward, the loan book of HLB will tend to be increasingly influenced by consumer fundamentals in light of its high concentration in consumer lending as against corporate lending. Also, as part of an enlarged financial services group, cross-sell opportunities should continue to 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 RM1 billion. However, HLA’s net profit for FY2006 suffered a drop of 5.7% and 2.1% at the company and group levels respectively, as a result of lower investment income and lower surplus transfer from its general insurance business. The general division has exhibited weaker earnings performance over recent years as reflected by the downward trend of its surplus transfer. Notwithstanding, HLA continues to be one of the leading fire insurers in the industry.

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, resulting in a debt-equity ratio of 0.24 times compared to the covenanted debt-equity ratio of 1.5 times. HLFG has maintained its double leverage ratio[1] at 1.2 times since FY2005 which is within the levels required to support its assigned ratings.

The positive outlook of the current ratings reflects the expectation that the positive earnings trend of the HLFG Group will be maintained. Continuing momentum in earnings growth, profitability measures and leverage improvements could lead to higher ratings in the near to intermediate term. However, the ratings would also be subject to developments in the macroeconomy.