Hong Leong Investment Bank Bhd - 2015

MARC has affirmed the long-term and short-term financial institution (FI) ratings of AA-/MARC-1 on Hong Leong Investment Bank Berhad (HLIB). The outlook on the ratings is stable.

The FI ratings reflect HLIB's established profit track record in investment banking and stockbroking operations, underpinned by franchise interlinkages between HLIB and other entities within Hong Leong Financial Group Berhad (HLFG), one of Malaysia’s largest financial services groups. The ratings are moderated by the investment bank’s adequate size and moderate track record in the domestic investment banking industry, which is characterised by intense competition.

For the nine-month financial period ended March 2015 (9MFY2015), HLIB posted a 13.0% year-on-year growth in pre-tax profit to RM46.9 million (9MFY2014: RM41.5 million), supported by lower operating expenses and higher net interest income. Operating expenses fell as a result of lower employee stock option charges, while interest income rose on increased holdings of investment securities. Profitability could have further improved had HLIB not been affected by some losses recognised on holdings of securities in the wake of volatile rate movements. In addition, a slowdown in capital market activities coupled with lower fee income due to completion delays of arranged deals had impacted the investment bank’s performance. The current challenging capital market environment is expected to weigh on the investment bank’s profitability over the near term.

MARC notes that HLIB is continuing its efforts to optimise its cost structure and initiate measures to support earnings growth; the investment bank’s stockbroking branch in Johor was closed and cross-selling arrangements through Hong Leong Bank Berhad (HLB) branches to boost its retail client base will be established. At the same time, HLIB is expected to further diversify its investment banking business regionally by leveraging on the group’s overseas financial services entities. As a result of its efforts, the cost-to-income ratio declined to 55.2% in 9MFY2015 (9MFY2014: 66.9%). HLIB’s Tier 1 and total capital adequacy ratios have improved to 18.7% and 22.3% respectively as at end-March 2015 (FY2014: 16.4%; 16.6%) although the ratios have declined since 2013. This was due to the increase in risk-weighted assets (RWA) arising from the investment bank’s move to build up its securities portfolio. The investment bank’s capital position was supported by a RM50 million Tier 2 securities issuance under its RM1.0 billion Multi-Currency Tier 2 Subordinated Notes Programme in 9MFY2015.  MARC understands that further issuances are set to take place in 2015 to address the lower CAR relative to the industry average of 31.5%.

HLIB’s funding has remained predominantly wholesale. Funding risk is mitigated by the bank’s reasonable holdings of liquid assets (37.3% of its assets); in addition, the bank has a standby US$40 million (RM144 million) revolving credit facility provided by HLB.

The stable outlook takes into account MARC’s expectation of moderate weakness in the domestic capital market. MARC also expects that HLIB will maintain its conservative risk appetite in its capital market activities.

Strengths

Challenges/Risks