MARC has affirmed the long-term and short-term financial institution (FI) ratings of AA-/MARC-1 on Hong Leong Investment Bank Berhad (HLIB). The outlook on the ratings is stable.

The FI ratings reflect HLIB's improved standalone business and financial profile as well as its established track record in investment banking and stockbroking operations that have enabled the investment bank to record healthy profitability and maintain prudent metrics. MARC also views that the franchise inter-linkages between HLIB and other entities within the Hong Leong group continue to benefit the investment bank. The ratings are, however, moderated by the susceptibility of HLIB’s earnings profile to investment banking and stockbroking activities and the bank’s position as a medium-sized entity in the intensely competitive banking and stockbroking environment. 

For the nine-month financial period ended March 2014 (9MFY2014), HLIB’s performance benefitted from improved stockbroking trading activity on Bursa Malaysia for both retail and institutional trades. In addition, the bank’s securities trading and investment activities saw a sharp improvement on the back of HLIB’s strategy of strengthening its treasury operations by building up its securities assets in both US dollar- and ringgit-denominated bonds to generate a stable income stream.  However, HLIB registered a lower total income of RM125.5 million for 9MFY2014 compared to RM131.5 million for pro-forma 9MFY2013 (inclusive of the former HLIB’s pre-merger operating performance between July and September 2012 for comparative purposes) due mainly to lower earnings contribution from the investment banking division. The uncertainty in the financial market over the impact of a potential interest rate hike and Bank Negara Malaysia’s stringent policy guidelines have weighed on HLIB’s recent performance.  

HLIB is expected to further strengthen its investment banking operations to balance its income stream in order to be less reliant on the competitive stockbroking business. MARC views the strategy positively given the characteristically higher profit margins investment banking activities compared to the thinning margins in the stockbroking segment. However, the market-sensitive nature of most of the investment banking activities poses volatility risk to HLIB’s earnings. 

MARC also notes that the bank’s ability to continue to secure investment deals is dependent to some extent on its ability to attract and retain highly qualified employees, which may exert upward pressure on personnel costs. In 9MFY2014, the cost-to-income ratio increased to 66.9% from 61.2% in pro-forma 9MFY2013, driven by personnel-related expenses, contributing to lower pre-tax profit of RM41.5 million (pro-forma 9MFY2013: RM50.8 million).
 
The bank’s strategy of building up its securities portfolio resulted in higher risk-weighted assets (RWA) and a decline in capital adequacy ratios. As at end-March 2014, HLIB’s Tier 1 CAR and total CAR stood at 23.3% and 23.5% respectively (end-June 2013: 30.1%; 30.2%). MARC understands that the bank is exploring options to strengthen its regulatory capital via the debt capital market. In terms of funding, HLIB’s liquidity position has remained volatile due to dependence on wholesale funding. This is somewhat mitigated by the bank’s large position in liquid assets (46.5% of its assets); in addition, the bank has a standby US$40 million revolving credit facility provided by its sister company Hong Leong Bank Berhad.

The stable outlook on the ratings is underpinned by HLIB's sound financial fundamentals, improved business sustainability arising from management's earnings diversification efforts and adequate risk management culture.

Contacts:
Ezra Vendargon, +603-2082 2257/ ezra@marc.com.my;
Se Tho Mun Yi, +603-2082 2263/ munyi@marc.com.my;
Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.