CREDIT ANALYSIS REPORT

Kenanga Investment Bank Berhad - 2022

Report ID 6053890047005 Popularity 1074 views 29 downloads 
Report Date Dec 2022 Product  
Company / Issuer Kenanga Investment Bank Bhd Sector Finance - Financial Institution
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Rationale
Rating action         

MARC Ratings has affirmed its financial institution (FI) ratings of A+/MARC-1 on Kenanga Investment Bank Berhad (Kenanga) with stable outlook. 

Rationale   

The ratings affirmation is primarily driven by Kenanga’s strong market position and lengthy experience in the domestic stockbroking industry. Apart from this, the ratings also consider the bank’s improving position in investment and wealth management, and its consistently moderate income from its investment banking activity. These strengths are counterbalanced by the susceptibility of its income generation to capital market and economic conditions.

Kenanga is one of the top three stockbrokers in the country by market share with 30.2% in the retail segment for 1H2022 (1H2021: 26.8%). With a sizeable remisier base of 759 individuals and growing online trading activities, the group has built a strong reputation in the domestic stockbroking industry. In addition, its online share trading platform Rakuten, co-owned with Rakuten Securities, Inc., Japan’s second-largest online brokerage firm, has continued to gain traction in the industry. The total number of accounts on the platform rose to 250,481 as at end-1H2022 (2021: 236,387), contributing to about 14.5% of Kenanga’s trading value during the period.

We note that its assets under administration (AUA) increased significantly by 35.8% y-o-y to RM18.8 billion as at end-2021, mainly due to increased sales and, to some extent, the acquisition of i-VCAP Management Sdn Bhd (i-VCAP) in February 2021. The acquisition has allowed the group to strengthen its position in the investment and wealth management segment which recorded a jump in pre-tax profit to RM34.9 million (2020: RM13.6 million) due to higher fee income generated on the back of a larger AUA size.

Its investment banking segment also generates interest income from its gross loan portfolio, which stood at RM1.7 billion as at end-1H2022 (2021: RM1.8 billion). The loan portfolio comprises share margin financing which accounts for 66.9% while 29.3% was made up of term loans. In 2021, pre-tax profit further improved by 10.0% y-o-y to RM148.2 million. For 1H2022, Kenanga recorded a sharp decline in trading value by 55.0% y-o-y to RM61.6 billion in line with the subdued market sentiment. Accordingly, Kenanga’s pre-tax profit was lower at RM41.8 million during the period (1H2021: RM80.3 million). 

Kenanga’s consolidated Common Equity Tier 1 (CET1) and total capital ratios stood at 17.5% and 24.9% as at end-1H2022 (1H2021: 17.3%, 24.8%), providing sufficient buffer against potential erosion in asset quality. Kenanga issued a Tier 2 Subordinated Note programme amounting to RM185.5 million which improved its capitalisation level as at end-1H2022. 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 43.4% of total liabilities as at end-June 2022. The high funding concentration poses some liquidity risk to the bank, although this is mitigated by sizeable liquid assets of 36.8% of total assets. Liquidity coverage ratio (LCR) stood at 155% in 1H2022 (2021: 152%).

Rating outlook

The stable outlook reflects our expectation that Kenanga will maintain its key financial metrics that are broadly in line with the rating band.

Rating trajectory

Upside scenario

Any likelihood of an upgrade would be guided by a sustained improvement in Kenanga’s profit performance while the performance of its other credit metrics is maintained.

Downside scenario

The ratings could be downgraded if economic and financial market disruptions place downward pressure on Kenanga’s earnings.

Key strengths
  • Strong market position in stockbroking
  • Strengthened position in investment and wealth management
  • Established track record in investment banking activities

Key risks
  • Performance susceptible to capital market volatility and economic conditions
  • Competitive landscape

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