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 ratings reflect HLIB's steady business and credit profile which are underpinned by its position as the capital market arm of Hong Leong Financial Group Berhad (HLFG), one of Malaysia’s largest financial services groups. The ratings are moderated by the investment bank’s susceptibility to capital market conditions and the prevailing intense competition in the investment banking industry.

For nine months of the financial year ended June 2016 (9MFY2016), HLIB’s financial performance reflected the slowdown in domestic capital market activities. However, fee and commission income was only marginally lower at RM72.1 million (9MFY2015: RM74.4 million) as higher arranger fee income has offset the decline in brokerage income and advisory fee. Net interest income, which is generated mainly from investment in debt securities, declined 9.3% year-on-year (y-o-y) to RM29.9 million due to a low interest rate environment. The bank’s 8.4% y-o-y increase in net profit to RM50.8 million in 9MFY2016 was due to a tax credit of RM6.7 million.

MARC views the current challenging market conditions will continue to weigh on HLIB’s profitability over the near term, although the profitability risk is somewhat moderated by the recurring income from its securities investment segment. HLIB reduced its exposure to foreign currency bonds to 10.5% of its financial asset portfolio as at end-March 2016 from 20.7% in the previous corresponding period due to the volatility in global markets. MARC understands that HLIB is undertaking initiatives to improve its stockbroking segment, which contributed 43.5% of pre-tax profit in 9MFY2016, by strengthening its online retail business and collaborating with related-entity Hong Leong Bank Berhad to expand its services to retail clients. Currently, the retail business constitutes about 50% of the bank’s total stockbroking transactions. MARC also notes that although the bank’s cost-income ratio rose to 58.7% (9MFY2015: 55.2%), it remains one of the lowest among its peers.

HLIB’s common equity Tier 1 ratio and total capital ratio (total CAR) increased to 24.4% and 28.6% respectively as at end-March 2016 (FY2015: 20.8%; 24.5%) mainly on lower risk-weighted assets (RWA). The credit and market RWAs were lower due to the decrease in net loans and securities portfolio in longer maturity categories. However, MARC notes that the bank’s total capital base declined by 10.3% from end-FY2015 arising from the bank’s high dividend payout.

HLIB’s funding has remained predominantly wholesale. As at end-March 2016, deposits and placements from banks and other financial institutions continue to form the largest portion at 67.0% of HLIB’s funding base (end-FY2015: 68.7%). Funding risk is mitigated by the bank’s reasonable holdings of liquid assets with a liquid assets ratio of 48.2%.

The stable outlook reflects MARC’s expectation of moderate weakness in the domestic capital market. MARC also expects that HLIB will maintain its conservative risk appetite in undertaking capital market activities.

Contacts:
Afeeq Amiri, +603-2082 2256/ afeeqamiri@marc.com.my;
Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.