CREDIT ANALYSIS REPORT

KENANGA INVESTMENT BANK BERHAD - 2017

Report ID 5559 Popularity 1018 views 20 downloads 
Report Date Oct 2017 Product  
Company / Issuer Kenanga Investment Bank Bhd Sector Finance - Financial Institution
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Rationale

MARC has assigned long-term and short-term financial institution (FI) ratings of A+ and MARC-1 to Kenanga Investment Bank Berhad (Kenanga) with a stable outlook. The ratings are mainly premised on Kenanga’s established track record in investment banking activities as well as its position as a medium-sized investment bank and moderate profitability metrics.

Kenanga is primarily involved in three key business segments: stockbroking, investment banking and investment management, accounting for 48%, 37% and 10% respectively of consolidated revenue of RM343.5 million for 1H2017. The bank is the largest retail stockbroker domestically, with a market share of about 17% as at date. This position has been built largely on the back of a wide network of 29 branches and a sizeable remisier base of about 800 as at end-June 2017. MARC notes that the bank has strengthened its online trading platform through an equal partnership with Rakuten Securities Inc, Japan’s second-largest securities brokerage firm, to set up a joint-venture company. Since its launch in May 2017, this trading platform has attracted more than 3,000 clients.

The bank’s stockbroking revenue rose by 23% y-o-y to RM164.2 million for 1H2017 on improved market conditions and higher retail participation. Its share margin financing continues to make up a sizeable portion of its total loan portfolio, which registered a 2.3% y-o-y growth for 1H2017. The rating agency notes that Kenanga’s share margin financing accounted for about 173.8% of total shareholders’ funds as at end-June 2017, lower than the maximum limit of 200.0% allowed by the regulator. This implies that future loan growth in share margin financing may be constrained by the limit. Kenanga’s overall loan quality has remained sound, with gross impaired loans ratio standing at 0.12% as at end-June 2017 compared to the industry average of 5.1%.

Kenanga’s investment banking revenue rose by 12.9% y-o-y to RM129.2 million for 1H2017, supported partly by higher fees from the advisory segment in which it has a strong market position arising from its status as a standalone investment bank. Nonetheless, Kenanga does not benefit from being part of a large banking group unlike many of its peers which can leverage on broader financial services. Its investment management business remains small, although assets under management (AUM) growth has been healthy at 6% compounded annual growth rate over the last three years, standing at RM7.5 billion as at end-2016. For 1H2017, the investment management segment’s revenue improved to RM34.3 million with losses before tax narrowing to RM4.1 million.

For 1H2017, Kenanga’s total operating income improved by 13.4% y-o-y to RM230.5 million. However, with a cost-to-income ratio of 92%, largely due to substantial commission expenses and costs of maintaining its branch network, net profit remained modest at RM6.2 million. Its Common Equity Tier 1 (CET1) ratio of 26.7% as at end-June 2017 remains strong, well above the minimum regulatory requirement of 5.75%. The bank has also set up a Basel III-compliant Tier 2 Subordinated Notes programme of RM250 million in 2017.

In terms of funding and liquidity profile, Kenanga relies on short-term wholesale customer deposits, with deposits from non-bank financial institutions and business enterprises collectively accounting for 71% of total funding as at end-June 2017. The high funding concentration poses some liquidity risk to the bank, although this is mitigated by sizeable liquid assets of about 36% of total asset. Liquidity coverage ratio stood at 127%, higher than the minimum 100% required to be complied by early-2019.

The stable outlook reflects MARC’s expectation that Kenanga will maintain its current position in investment banking activities and financial performance that are commensurate with the rating. Any improvement in rating and/or outlook will be driven by higher profitability metrics, arising from cost rationalisation measures or other initiatives.

Major Rating Factors

Strengths

  • Established track record in investment banking activities;
  • Strong market position in the retail stockbroking segment; and
  • Experienced management team.

Challenges/Risks

  • Financial performance is susceptible to capital market activities; and
  • Elevated cost base.
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