CREDIT ANALYSIS REPORT

KENANGA INVESTMENT BANK BERHAD - 2018

Report ID 5805 Popularity 1105 views 54 downloads 
Report Date Oct 2018 Product  
Company / Issuer Kenanga Investment Bank Bhd Sector Finance - Financial Institution
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Rationale

MARC has affirmed its long-term and short-term financial institution (FI) ratings of A+ and MARC-1 on Kenanga Investment Bank Berhad (Kenanga). The FI ratings are based on a national rating scale. The outlook on the ratings is stable.

The affirmed ratings are primarily premised on Kenanga’s strong competitive position in the retail stockbroking business in Malaysia, its sound capital position, its moderate profitability metrics and adequate funding profile. The stable outlook reflects MARC’s expectation that Kenanga will maintain its current market position and financial performance that are commensurate with the ratings. Any improvement in the rating and/or outlook would be driven by an improvement in its profitability metrics.

Kenanga’s strong stockbroking franchise is reflected by its retail market share of about 20.0% in 1H2018 (2017: 19.6%). This position has largely been built on the back of a wide network of 29 branches and a sizeable remisier base of 782 as at end-June 2018. Its tie-up with Japan’s second-largest online brokerage firm Rakuten Securities, Inc, is expected to further strengthen its retail market position. It is also seeking to acquire a domestic retail-oriented brokerage firm.

Its core business remains stockbroking which accounted for 44.0% of the consolidated revenue in 1H2018 followed by treasury and investment banking activities at 39.4%. Apart from stockbroking fees, the bank generates interest income from its loan portfolio, which stood at RM2.1 billon as at end-1H2018. Its loan portfolio mainly comprises share margin financing which is expected to increase following the easing of the rule on share margin financing that had previously placed a limit of 200% of shareholders’ funds. Its gross impaired loans (GIL) ratio rose to 2.52% in 1H2018 but remains lower than the industry average of 4.8%. The increase in GIL is attributed to the weak share market performance during the period.

Investment banking revenue is largely attributed to interest income and investment income on government securities and investment-grade private debt securities. Unlike many of its peers, Kenanga does not belong to a larger banking group to be able to leverage on broader financial services. Nonetheless, it has broadened its income base with revenue contribution from the investment management segment increasing to 12.2% in 1H2018 from 5.4% in 2015, notwithstanding the fact that assets under management remained moderate at RM7.4 billion as at end-June 2018.

In 1H2018, total income declined by 4.0% y-o-y to RM221.3 million mainly on lower trading income and brokerage fees. Its high cost-to-income ratio of 93.0% is largely due to substantial commission expenses and costs of maintaining its branch network. Net profit rose to RM18.6 million from RM6.2 million in 1H2017, boosted by an impairment write-back of RM13.5 million. On excluding the one-off impairment write-back, net profit would decline by 18.9% y-o-y to RM5.1 million. Consolidated Common Equity Tier 1 ratio declined to 22.8% largely due to higher dividends paid during 1H2018 but remains well above the minimum regulatory requirement of 7.0% to be complied with by early-2019.

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 70.6% of total liabilities as at end-June 2018. The high funding concentration poses some liquidity risk to the bank, although this is mitigated by sizeable liquid assets of 36.6% of total assets. Liquidity coverage ratio stood at 188% as at end-June 2018, higher than the minimum 100% requirement to be complied with by early-2019.

Major Rating Factors

Strengths

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

Challenges/Risks

  • Susceptibility to capital market activities; and
  • Elevated cost base.
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