MARC Ratings has affirmed its long-term and short-term financial institution (FI) ratings of AA-/MARC-1 on KAF Investment Bank Berhad (KAF IB). The ratings outlook is stable.

KAF IB’s low-risk business model, underpinned by a conservative investment strategy, and strong liquidity and capitalisation levels remain key rating drivers. The susceptibility of KAF IB’s performance to domestic capital market conditions and interest rate environment, which have led to earnings volatility, is a key moderating factor. 

KAF IB remains mainly focused on trading and investing in the money market and fixed-income securities, funded largely via interbank and short-term deposits from corporates. As at end-9MFY2022, sovereign issuances and private debt securities (PDS) with a AAA rating or government-guarantee accounted for 90.2% of the investment bank’s investment portfolio, reflecting a conservative investment strategy.  KAF IB faced fewer profit-making opportunities during 9MFY2022 with gain in trading of securities decreased to RM6.5 million (9MFY2021: RM63.1 million). Revenue declined 51.4% y-o-y to RM132.6 million. Coupled with a lower net interest/profit income of RM71.1 million (9MFY2021: RM121.9 million), this has led to pre-tax profit declining 69.1% y-o-y to RM64.0 million. The lower net interest/profit income during the period was a result of margin compression of 137 bps to 1.60% (9MFY2021: 2.97%).

The consecutive hikes in overnight policy rate (OPR) in May and July 2022, as well as possible further increases in 2H2022 leaves KAF IB with minimal profit-taking opportunities in the near term. The bank’s capability in managing the duration of fixed-income securities is expected to partly mitigate the negative impact. The capitalisation levels remained healthy with Common Equity Tier 1 (CET 1), Tier 1 capital and total capital ratios standing at 109.5%, 109.6 and 110.5%. Notably, KAF IB’s total capital base of RM1.3 billion mainly consists of paid-up capital, retained earnings and statutory reserves, accounting for 99.1% of the total capital base as at end-9MFY2022 (2021: 99.2%). 

In April 2022, a consortium led by KAF IB with an 80% stake was awarded a digital banking license under the Islamic Financial Services Act 2013. MARC Ratings understands that the expected commencement of business will be in 12-15 months. KAF IB will allocate RM120 million as the initial investment during the five-year foundational period including the required minimum capital requirement of RM100 million. MARC Ratings views that KAF IB’s venture into the digital banking business will have minimal impact on its existing operations and financial performance in the near term. 

The stable outlook reflects MARC Ratings’ expectation that KAF IB will continue to manage its credit and market risk by adhering to a prudent investment policy such that its credit profile remains within the rating band.

Any likelihood of an upgrade would be guided by a sustained improvement in its profit performance and/or changes in its business profile that would support a more diversified and less volatile performance. 

The rating could come under pressure if there is a significant change/shift to a riskier investment strategy that would negatively impact profit performance.