CREDIT ANALYSIS REPORT

KAF INVESTMENT BANK BERHAD - 2020

Report ID 60573 Popularity 124 views 6 downloads 
Report Date Jul 2020 Product  
Company / Issuer KAF 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 AA- and MARC-1 on KAF Investment Bank Berhad (KAF IB) with a stable outlook.

The ratings are mainly driven by KAF IB’s low-risk business model and its strong liquidity and capitalisation levels that are underpinned by a conservative investment strategy. Moderating the rating is the susceptibility of bank’s performance to capital market conditions and interest rate environment. The stable outlook reflects assumes KAF IB will manage its exposure to credit and market risks by adhering to a prudent investment policy.

KAF IB remains focused on trading and investing in money-market and fixed-income securities, and is largely funded by interbank borrowings and short-term deposits from corporates. Liquidity risk arising from its reliance on short-term wholesale funding is mitigated by its high liquid asset ratio and prudent investment policy, as reflected by its liquid asset ratio of 67.3% as at end-February 2020 (2019: 62.6%) and substantial holdings of high credit-quality instruments such as sovereign issuances and private debt securities (PDS) with AAA ratings or government guarantees, which made up 74.6% of its investment portfolio. Its business strategy of adjusting its investment portfolio in response to anticipated interest rate movements and mitigate funding volatility has allowed it to remain resilient through economic and interest rate cycles.

For the nine months ended February 28, 2020 (9MFY2020), KAF IB’s income rose 60.2% y-o-y to RM201.6 million (9MFY2019: RM125.8 million) as the bank took profit on its debt securities holdings. These investments had seen price increases on the back of sharp cuts in the overnight policy rate (OPR) by Bank Negara Malaysia (BNM) in view of the COVID-19 pandemic. As a result, the bank’s pre-tax profit more than doubled to RM147.3 million and accordingly, its annualised return on assets (ROA) and return on equities (ROE) rose to 3.2% and 12.8%. Moving forward, the recent cut in the OPR, and the accommodative policy stance adopted by global central banks will likely continue continue to lend support to bond prices. This in turn will provide the bank with greater profit-taking opportunities from its substantial bond portfolio.

The investment bank’s total funding base fell 51.6% y-o-y to RM3.5 billion as at 9MFY2020, as the realisation of capital gains on bond investments led to the decline in funding requirement and subsequent paring down of obligations. The investment bank’s Tier 1 and total capital ratios remained strong at 110.0% and 111.3% as at  end-February 2020, well above the Malaysian investment banking industry average of 38.5% and 42.5%. The bank’s capital continued to comprise quality components – primarily paid-up capital, retained earnings and statutory reserves, all of which made up around 98.8% of the total capital base.

Major Rating Factors

Strengths
Healthy liquidity position and strong capitalisation; 
Conservative investment strategy; and
Longstanding track record of sound performance through economic
        cycles.

Challenges/Risks
Performance susceptible to capital market conditions; and
Reliance on price-sensitive institutional funds. 


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