MARC has affirmed its long-term and short-term financial institution ratings of AA-/MARC-1 on KAF Investment Bank Berhad (KAF Investment). The affirmed ratings reflect KAF Investment’s strong capital adequacy position, prudent risk management, and comfortable levels of liquidity. The ratings are moderated by the investment bank’s earning and funding profile. The outlook on the ratings is stable.

KAF Investment is one of the largest investment banks by assets in Malaysia with an asset base of RM8.8 billion as at end-May 2013. The bank is majority owned by its founder and managing director Datuk Khatijah Ahmad, through an 80% stake in KAF Investment’s ultimate holding company AKKA Sdn Bhd, whose leadership continues to be an important factor in the strength and sustainability of the bank’s franchise.

KAF Investment recorded lower overall revenue of RM138.4 million for the year ended May 2013 (FY2013) compared to RM203.5 million for FY2012 following a decline in trading profit. For FY2013, gains from securities trading declined to RM80.4 million (FY2012: RM193.4 million) due to the reduced profit-taking opportunities in the debt capital market. MARC notes that the deterioration in trading profits was somewhat offset by the sharp rise in interest income to RM53.2 million in FY2013 (FY2012: RM3.3 million). This was attributed to an increase in investment allocation in private debt securities and money market instruments. As a result, the contribution of interest income to total revenue expanded to 38.5% in FY2013 (FY2012: 1.6%). For FY2013, KAF Investment registered a lower pre-tax profit of RM115.3 million (FY2012: RM163.5 million) and a lower return on assets (ROA) and return on equity (ROE) of 1.03% and 7.65% respectively (FY2012: 1.31%; 11.32% respectively). MARC expects that KAF Investment’s profitability measures will continue to be pressured amid a low interest rate environment and subdued economic condition.

KAF Investment’s funding base continued to be dependent on deposits from institutions which constitute 93% of total deposits as at end-FY2013. MARC observes that the funding base improved by 15.2% to RM7.6 billion in FY2013 (FY2012: RM6.6 billion). The investment bank’s holding of short-term assets increased to RM5.7 billion in FY2013 from RM4.4 billion in FY2012 but could reduce should it build up its investment portfolio. As at FY2013, liquid assets constituted 64% of total assets (FY2012: 57%) with the remaining asset base comprising highly rated private debt securities, of which 98% was rated at AA and above.

MARC observes that the bank’s core capital ratio (CCR) and risk-weighted capital ratio (RWCR) were strong at 78.5% and 78.9% respectively at end-May 2013 despite declining from 101.0% and 101.6% respectively as at end-May 2012. The decline in the capital adequacy ratio was due to an increase in risk-weighted assets, higher dividend payout of RM60 million and regulatory adjustments arising from the implementation of the Basel III capital adequacy framework in FY2013. Nonetheless, KAF Investment’s capitalisation remained considerably higher than Malaysian investment banking industry’s average CCR and RWCR of 27.2% and 27.3% respectively as at end-May 2013.

The stable outlook reflects MARC’s expectation that the bank’s approach in managing risks and conservative credit and market risk profiles will position the bank well to face a volatile capital market.

Contacts:
Oo Chin Kai, +603-2082 2260/ chinkai@marc.com.my;
Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.