KAF Investment Bank Bhd - 2014

MARC  has  affirmed  the long-term  and  short-term  financial  institution ratings of AA-/MARC-1 on KAF Investment Bank Berhad (KAF Investment). The outlook on the ratings is stable. The affirmed ratings reflect KAF Investment’s strong capital adequacy position and healthy liquidity levels, underpinned by a conservative investment strategy. The ratings are moderated by the investment bank’s fluctuating financial performance which is highly susceptible to domestic capital market conditions and the interest rate environment.

KAF Investment is one of the largest investment banks by asset size in Malaysia with total assets of RM9.3 billion as at end-May 2014. It has maintained a strong performance track record, albeit an uneven one mainly due to its business profile which is largely driven by capital market conditions. KAF Investment focuses on investing and trading of money market and fixed income securities rather than corporate deal arrangements. MARC notes that the investment bank’s ability to invest in fixed income securities that provide appropriate returns with potential for capital appreciation as well as manage its funding costs by securing wholesale funding remains key to its profitability. MARC draws comfort that its fixed income securities are in Malaysian Government Securities (MGS), Government Investment Issues (GII), and higher rated Private Debt Securities (PDS).
 
For financial year ended May 2014 (FY2014), KAF Investment recorded revenue of RM198.0 million and pre-tax profit of RM169.4 million (FY2013: RM138.4 million; RM115.3 million); however, on excluding a one-off gain of RM86.3 million from litigation recovery recognised during the year, revenue and pre-tax profit would decline by 19.3% and 27.9% year-on-year to RM111.7 million and RM83.1 million. The lower revenue was due to the challenging capital market conditions which led to lower net gains from sale of securities. Higher operating cost also contributed to the lower profitability, with the cost-to-income ratio increasing to 25.6% in FY2014 (FY2013: 16.7%). Nonetheless, MARC notes that interest income was slightly higher at RM256.4 million (FY2013: RM240.6 million) while fee income improved to RM4.6 million (FY2013: RM2.2 million), although the contribution from corporate advisory services to the bank’s total income remained small. 

KAF Investment’s funding base is heavily skewed towards wholesale funding from corporate and financial institution deposits, which are more sensitive to interest rate movements. In FY2014, KAF Investment’s funding base grew by 6.2% to RM8.1 billion to support its increased allocation in government securities and  Negotiable Instrument of Deposits (NID). MARC observes that the investment bank has the flexibility to draw funds for investments from its significant holdings of liquid assets of RM6.0 billion in FY2014 (FY2013: RM5.7 billion). The liquid asset ratio increased to 65.1% in FY2014 (FY2013: 64.3%) mainly due to the increase in holdings of MGS and GII to RM2.0 billion (FY2013: RM302.8 million) and NIDs to RM3.3 billion (FY2013: RM2.8 billion). MARC notes that KAF Investment’s liquidity position remains comfortable as evidenced by its high liquid asset ratio and conservative investment policy. As at end-FY2014, KAF Investment’s investment portfolio comprises 71.7% of sovereign issuances or PDS with a AAA rating (FY2013: 40%), with the remaining consisting of investments with a MARC rating of AA- or its equivalent.  

KAF Investment’s Tier 1 capital ratio and total capital ratio remained strong at 75.5% and 76.1% respectively at FY2014, albeit a slight decline from 76.1% and 76.6% in FY2013. The lower capital adequacy ratio in FY2014 was due to higher risk weightage on account of the increase in NID holdings. Nonetheless, KAF Investment’s Tier 1 capital ratio and total capital ratio remained well above the Malaysian investment banking industry average which stood at 25.0% and 25.6% respectively as at end-May 2014. KAF Investment’s capital quality remains strong, mainly consisting of paid-up capital, retained earnings and statutory reserves which made up 96.3% of total regulatory capital.

MARC also observes that the KAF Investment’s founder and majority shareholder Datuk Khatijah Ahmad remains the key driver of the group’s business strategy. Notwithstanding Datuk Khatijah’s strong expertise,   management continuity is an important factor in sustaining the investment bank’s franchise.

The stable outlook reflects MARC’s expectation that KAF Investment’s ability to manage credit and market risks in relation to its operations will be maintained through its continued adoption of a conservative investment policy.    

Major Rating Factors

Strengths

• Strong capitalisation and comfortable liquidity position; and
• Conservative investment strategy.

Challenges/Risks

• Competition from larger bank-backed investment banks; and
• Reliance on wholesale funding.