MARC has today assigned long-term and short-term financial institution (FI) ratings of AA-/MARC-1 with a stable outlook to Hong Leong Investment Bank Berhad (new HLIB, renamed from MIMB Investment Bank Berhad (MIMB)). At the same time, the rating agency has withdrawn former Hong Leong Investment Bank Berhad's (former HLIB, now known as Promilia Sdn Bhd) ratings.

The rating actions follow a review by MARC of the strategic initiatives, operating results and financial fundamentals of the new HLIB after the completion of the merger between MIMB and former HLIB (known as Promilia Sdn Bhd) on September 29, 2012. The former HLIB was merged into MIMB with MIMB being the surviving entity. The ratings of HLIB are the same as the pre-merger ratings of former HLIB despite the change in legal entity, reflecting no material changes in the post-merger risk profile of the investment bank. It is noted that the former MIMB's assets and operations constitute a relatively small part of the new HLIB's assets and business.

The ratings reflect HLIB's improving business mix and reduced reliance on stockbroking revenues, sustained profitability, sound capital ratios, and prudent liquidity and risk management. HLIB holds a well-defined niche position focusing on middle market companies. Moderating these positives are the heightened competition in its stockbroking and investment banking businesses, the inherent volatility in these businesses and corresponding implications for its earnings profile. The FI rating incorporates a one-notch rating uplift for parent support from Hong Leong Financial Group (HLFG) (AA/MARC-1/Stable) in light of the franchise inter-linkages between HLIB and other group entities.

Since MARC's last rating action on the former HLIB, good progress has been achieved in relation to management's diversification efforts in earnings, particularly in terms of building up the bank's investment banking franchise. HLIB has also been focusing on the institutional stockbroking business to counter the shrinking volumes and falling revenues in the retail stockbroking segment. MARC believes that these strategic initiatives will likely improve HLIB's prospects of achieving more stable earnings and positive earnings growth, going forward.

The new HLIB reported higher pro-forma revenues and earnings for the nine month period ended March 31, 2013 (9MFY2013) compared to former HLIB's results for the prior year’s corresponding period. The pro forma 9MFY2013 results of HLIB incorporate results of former HLIB for the period between July and September 2012 to facilitate analytical comparison.  HLIB posted pro-forma revenues and pre-tax profit of RM131.5 million and RM50.8 million respectively for 9MFY2013. The main driver of revenue and earnings growth was higher income generation by its investment banking operations, rather than improved brokerage earnings from HLIB's expanded post-merger stockbroking capabilities. Investment banking contributed 67.1% and 83.0% of total revenue and operating profits respectively. MARC notes increased cost pressures at HLIB during the nine month period, driven by higher staffing costs and evidenced by HLIB's post-merger cost-to-income ratio of 61.2% for 9MFY2013 (former HLIB 's full year FY2012: 58.8%). The weakening profitability of HLIB's expanded stockbroking operations is exerting pressure on the bank's overall profitability metrics although the bank has managed to expand its revenue base.

Both HLIB's Tier-1 and total capital ratios stood at 20.4% as of end-March 2013. While this represents a decline from former HLIB's core and risk weighted capital adequacy ratios of 23.1% and 23.5% respectively as of end-June 2012, the current capitalisation level is viewed to be satisfactory relative to the investment bank's risk profile.

MARC considers HLIB's liquidity to be sound; the large position in liquid assets (70.7% of its assets) mitigates its reliance on wholesale funding, mainly from financial institutions. Additionally, the rating agency opines that Hong Leong Bank Berhad, the sister bank to HLIB, has meaningful capacity to support the investment bank's liquidity.

The stable outlook on the ratings is underpinned by HLIB's sound financial fundamentals, management's earnings diversification efforts, adequate risk management culture and MARC's parent support assessment.

Contacts:
Sharidan Salleh, +603-2082 2254 / sharidan@marc.com.my;
Se Tho Mun Yi, +603-2082 2254 / munyi@marc.com.my.