CREDIT ANALYSIS REPORT

KAF INVESTMENT BANK BERHAD - 2021

Report ID 605389010 Popularity 695 views 38 downloads 
Report Date Jul 2021 Product  
Company / Issuer KAF Investment Bank Bhd Sector Finance - Financial Institution
Price (RM)
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Rationale
Rating action     
MARC has affirmed its long-term and short-term financial institution (FI) ratings of AA-/MARC-1 on KAF Investment Bank Berhad (KAF IB) with a stable outlook.

Rationale     
The ratings primarily reflect KAF IB’s low-risk business model and strong liquidity and capitalisation levels, underpinned by a conservative investment strategy. The ratings are moderated by the susceptibility of KAF IB’s performance to the domestic capital market conditions and interest rate environment that have led to earnings volatility.

KAF IB has remained fairly resilient in the prevailing tough economic environment, largely due to its ability to readily adjust its investment strategy in line with market conditions. For the nine months ending February 2021 (9MFY2021), its revenue expanded 35.4% y-o-y to RM273.0 million as it realised profits on its bond holdings, benefiting from an aggregate 125bp cut in the overnight policy rate (OPR). Its pre-tax profit grew by 40.7% y-o-y to RM207.3 million; accordingly, return on assets (ROA) and return on equity (ROE) improved y-o-y to 3.72% and 13.88%. Over the near term, KAF IB may not be able to replicate its performance on fewer profit-taking opportunities amid a stable but low interest rate environment. In view of these factors, the investment bank aims to expand its balance sheet supported by a spur in issuances of Malaysian Government Securities (MGS) and Malaysian Government Investment Issues (MGII).

KAF IB’s sound liquidity position as reflected by a liquid asset ratio of 94.1%, underpinned by a conservative investment policy, helps to mitigate funding volatility given its reliance on short-term wholesale funding to finance operations. As at end-February 2021, government and government-guaranteed issuances and private debt securities (PDS) with a AAA rating accounted for 89.1%.

KAF IB’s total capital base of RM1.46 billion, which consists of mainly paid-up capital, retained earnings and statutory reserves, accounting for 98.9% as at 9MFY2021, has remained strong. Its tier 1 capital and total capital ratios stood at 66.8% and 67.5%, albeit lower than the previous year (9MFY2020: 110.0% and 111.3%). The lower capital ratios were largely due to higher risk-weighted assets for market risk arising from holding of marketable securities as trading book position (9MFY2021: RM1.0 billion; 9MFY2020: RM400.2 million). 

Rating outlook     
The stable outlook reflects the expectation that KAF IB will manage its credit and market risk in relation to its operations and continue to adhere to a prudent investment policy.

Rating trajectory

Upside scenario     
Any likelihood of an upgrade would be guided by a sustained improvement in its profit performance.

Downside scenario     
The rating could come under pressure if there is a significant change/shift to a riskier investment strategy negatively impacting profit performance. 

Key strengths
  • Healthy liquidity position and strong capitalisation
  • Conservative investment strateg
  • Longstanding track record of sound performance through economic cycles
Key risks
  • Performance susceptible to capital market conditions
  • Reliance on interest rate environment


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