MARC has affirmed its MARC-1/AA ratings on non-operating financial holding company Hong Leong Financial Group Berhad's (HLFG) RM1.8 billion Commercial Paper and Medium-Term Notes (CP/MTN) programme with a stable outlook. The affirmed ratings are underpinned by the favourable financial strength and established domestic market position of HLFG’s key subsidiary, commercial bank Hong Leong Bank Berhad (HLB), which continues to account for a significant majority of the group’s consolidated assets and earnings in addition to being the main dividend contributor to its parent. Accordingly, HLFG’s risk profile primarily reflects that of the commercial bank subsidiary rather than the insurance and investment banking subsidiaries, under HLA Holdings Sdn Bhd and Hong Leong Capital Bhd respectively.

MARC considers the financial performance of HLB as the primary determinant of the group’s debt serving capacity and refinancing flexibility; the commercial banking subsidiary accounted for 87.4% of the group’s consolidated operating profits and 90.1% of the group’s total consolidated assets for the nine-month period ended March 31, 2014 (9MFY2014). HLB has maintained favourable financial metrics: the gross impaired ratio stood at 1.20% while the loan loss reserve ratio was 129.6% as at end-9MFY2014 (end-FY2013: 1.39%; 128.4%). The bank’s modest loan growth during 9MFY2014 has also enabled it to maintain sound regulatory capital ratios with Basel III Tier-1 and total capital ratio standing at 11.0% and 13.2% respectively, although the ratios remain lower than the domestic banking industry’s average. 

HLB’s earnings performance has remained steady as pressure from net interest margin compression was moderated by loan book expansion. However the increase in net interest income of 5.7% in 9MY2014 from the previous corresponding period was partly offset by the 14.2% decline in non-interest income. For 9MFY2014, the bank recorded pre-tax profits of RM1,641.4 million (9MFY2013: RM1,620.8 million). MARC observes that HLB’s capacity to upstream dividends has been strengthened by the merger with EON Bank Berhad and deems the dividends to be sufficient to service HLFG’s current debt obligations and generate dividend payments at the holding company level. In 9MFY2014, HLB upstreamed dividends of RM429.0 million, a 19.1% increase from the corresponding period last year. Nonetheless, the rating agency remains mindful that the strong reliance on the banking subsidiary could expose HLFG to earnings volatility should the subsidiary need to conserve capital to meet regulatory requirements, more so under BNM’s stringent Basel III capital framework.

Furthermore, the new regulatory capital framework could lead to potential pressure on the group’s double leverage position should the holding company raise debt to support capital requirements at the regulated operating subsidiaries’ levels. However, MARC does not expect additional debt to be incurred for this purpose in the near term; HLFG’s double leverage ratio has continued to improve, standing at 108% as at end-9MFY2014 on debt repayment (FY2013: 110%). At the holding company level, debt declined to RM1,308.3 million as at end-9MFY2014 (FY2013: RM1,466.1 million). MARC observes that the holding company’s funding profile exhibits considerable reliance on short-term borrowings, which comprises 69.0% of the funding base as at end-9MFY2014 (FY2013: 52.8%). Moderating the liquidity risk is HLFG’s demonstrated good access to the debt capital markets and the availability of unutilised capacity in its CP/MTN programme of RM674 million as at end-March 2014.

The stable rating outlook reflects MARC’s expectations that HLB will maintain a financial profile that is commensurate with the AA+ rating and that there will be no material changes in the group’s overall risk profile. MARC also expects the group to undertake a prudent growth plan.

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