Hong Leong Investment Bank Bhd - 2011

MARC has assigned its AA-/MARC-1 financial institution ratings on Hong Leong Investment Bank Berhad (HLIB) with a stable outlook. HLIB’s standalone credit profile is commensurate with A+/MARC-1 ratings, reflecting its emerging position as a mid-tier investment bank with established stockbroking operations, good profitability and its potential to leverage on broader Hong Leong Group relationships to develop its corporate finance business. HLIB’s long-term rating benefits from a single-notch uplift from its standalone credit rating as a result of its relationship with an ultimate parent that possesses a stronger credit profile. MARC currently maintains debt ratings of AA/MARC-1 with a stable outlook on HLIB’s ultimate parent, Hong Leong Financial Group Berhad (HLFG). However, as a relatively young investment bank, HLIB faces significant competition from more established players.

Formerly known as HLG Credit Berhad and HLG Credit Sdn Bhd, HLIB is a wholly-owned subsidiary of intermediate holding company Hong Leong Capital Berhad (HLCB) and ultimate subsidiary of HLFG. HLIB, which obtained its investment banking licence in January 2009, is the single legal entity that was formed from the combination of several entities, namely SBB Securities Sdn Bhd (SBBS), Southern Investment Bank Berhad (SIBB) and HLG Securities Berhad (HLGS). Subsequently, the bank was awarded a capital markets services licence by the Securities Commission (SC) and an investment banking licence by Bank Negara Malaysia (BNM), allowing it to become a full-fledged investment bank.

HLIB operates through two divisions: stockbroking and securities and investment banking. Its stockbroking activities contributed 51.8% of the bank’s total income during 1HFY2011. HLIB’s stock broking business, ranked 12th among registered stockbroking companies, garnered a market share of 3.1% in 1HFY2011. The profitable stockbroking business provides the bank with a reasonable level of recurring income while it focuses on growing revenues from capital market activities and corporate advisory services. The investment banking division contributed 48.2% of total income during 1HFY2011 (FY2010: 24.2%), mostly attributable to fees generated from debt arranging and corporate advisory activities as well as underwriting commissions. Interest income from securities investments is gaining prominence to balance its more cyclical investment banking and stockbroking income streams. While investment banking operations are seen as an increasingly important factor in HLIB’s future growth plans, MARC believes that the stiff competition within the investment banking landscape could hinder efforts to develop HLIB into a formidable bulge bracket investment bank. However, MARC believes that HLIB has a generally good prospect of being developed into a niche player in the investment banking industry.

HLIB’s recent performance was bolstered by its commencement of various investment banking activities during the first six-month period ended December 31, 2010 (1HFY2011). Return on assets (ROA) and return on equity (ROE) improved to 2.07% and 13.09% respectively through the first six months of FY2011 (FY2010: 1.32% and 4.74% respectively). Both cost-to-income and cost-to-average assets measures also show improvements. Going forward, higher fee income and vigilant cost control should help underpin good bottom-line performance for FY2011.

HLIB, like other investment banks, relies mainly on wholesale funding from banks, insurance firms and asset management companies for its funding needs. Nonetheless, MARC considers liquidity to be adequately managed. HLIB has substantial holdings of highly liquid and good quality securities which places the bank in a good position to obtain contingency funding through repo transactions in the event of need.

HLIB started with an equity base of RM275.4 million. Much of its equity base then was attributable to premiums from issuance of redeemable preference shares which were subsequently converted into ordinary shares in FY2010. This strengthened the bank’s core capital ratio to 33.1% at end-FY2010. The bank’s capital ratios have since fallen as a result of recent asset growth. At end-December 2010, the bank’s core capital ratio and risk-weighted capital ratio declined to 28.2% and 28.6% respectively (FY2010: 33.1% and 33.5% respectively). While MARC notes that HLIB’s capitalisation levels are marginally lower than the Malaysian investment banking industry, the agency is of the view that the headroom over regulatory capital requirements remains ample and should adequately support growth in the near to intermediate term.

MARC opines that HLIB should be reasonably well positioned to make meaningful advances in the middle-market investment banking space in light of its experienced management team and the credibility afforded by its strategic ties with HLFG and its subsidiaries. The stable outlook on the ratings incorporates HLIB’s healthy earnings, its progress in broadening its revenue sources and improving earnings stability as well as its disciplined risk appetite.

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Challenges/Risks