Hong Leong Financial Group Bhd - 2010

MARC has upgraded the rating on Hong Leong Financial Group Berhad’s (HLFG) RM800 million Commercial Paper and Medium Term Notes Programme (CP/MTN) to AA/MARC-1 from AA-/MARC-1. The rating upgrade incorporates the demonstrated ability of its main banking subsidiary, Hong Leong Bank Berhad (HLB) to generate solid earnings through the recent challenging period, the sound financial and operating performance of its insurance business and the strong regulatory capital positions of its banking and insurance subsidiaries. HLFG’s financial flexibility and debt servicing capacity have benefited from the overall financial resilience of its banking and insurance subsidiaries; its cash flow interest coverage has averaged 10.3 times for the last three financial years mostly on account of stable dividends. HLFG’s ability to roll over short-term debt has remained strong since our last review in August 2009, which MARC views to be important in light of the holding company’s reliance on commercial paper funding. The rating also takes into consideration the challenges faced by the group from the competitive banking and insurance landscapes and incorporates the structural subordination of debts at the holding company to that of the group’s subsidiaries. The current rating action excludes an assessment of the likely impact of HLB’s proposed acquisition of the assets and liabilities of EON Capital Bhd and the implications of potential debt raising at the bank and/or holding company for the proposed acquisition. Should the acquisition proceed, MARC believes that the acquisition would provide an opportunity for HLB to enhance its franchise strength. The rating outlook is stable.

The group’s main subsidiary HLB and Hong Leong Assurance Berhad (HLA) are the two main contributors to HLFG’s dividend income. On average, the two companies contribute around 98.0% of the dividends upstreamed to HLFG. This stable dividend flows from both subsidiaries continue to underpin the holding company’s sound financial profile. HLB contributed 97.5% of HLFG’s segment results for the first three quarters of FY2010. Despite being faced with a challenging economic environment and highly competitive banking landscape, HLB’s earnings generation remained resilient. During the first nine months of FY2010, HLB’s stable profit generation translated into a higher annualised bank level return on assets (ROA) of 1.0% (FY2009: 0.94%) for HLB. The bank’s asset quality has also been continuously improving over the past four years, with the gross non-performing loans (NPL) ratio improving to 2.2% as at end-March 2010 from 5.1% as at June 2006 as a result of its strict origination standards and low risk appetite. Meanwhile, capitalisation remains fairly strong as denoted by HLB’s bank level risk-weighted capital ratio (RWCR) of 13.1% as at end-March 2010.

Overall, HLFG managed to sustain its financial performance in FY2009, resulting in a marginal increase in consolidated pre-tax profits by 2.7% to RM1,150.2 million despite the impact of the economic downturn, thanks to the resilient performance of HLB. With the gradual recovery of the general economic environment and the recent increase in the overnight policy rate (OPR), the group’s financial results are likely to improve further. At the company level, HLFG’s financial position remains strong as reflected by its moderate debt-to-equity ratio of 0.32 times and improved double leverage ratio of 113% at end-9MFY2010 (FY2009: 121%).

Ratings stability should be underpinned by continued positive developments in the domestic economic environment and the healthy financial profile of HLFG’s core subsidiaries. MARC expects the group to maintain a relatively conservative financial policy with regard to dividends and acquisitions in the near-to-intermediate term.

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