Press Releases MARC AFFIRMS ITS FINANCIAL INSTITUTION RATINGS OF AA-/MARC-1 ON KAF INVESTMENT BANK BERHAD

Tuesday, Oct 17, 2017

MARC has affirmed its long-term and short-term financial institution ratings of AA- and MARC-1 on KAF Investment Bank Berhad (KAF IB). The outlook on the ratings is stable.

The ratings reflect KAF IB’s key credit strengths that include strong capital ratios and liquidity levels, underpinned by a conservative investment strategy. The susceptibility of the bank’s performance to domestic capital market conditions and to interest rate movements is a key moderating factor to the ratings.

For the financial year ended May 2017 (FY2017), KAF IB recorded higher revenue and pre-tax profit of RM172.7 million and RM138.6 million respectively, mainly on the back of higher interest income from an increased asset base which rose to RM8.7 billion from RM7.6 billion in the previous year. KAF IB’s assets continue to be dominated by highly liquid Malaysian sovereign securities, negotiable instruments of deposits (NID) and private debt securities (PDS), which have collectively risen to RM7.3 billion (end-FY2016: RM6.2 billion). This composition has enabled the bank to readily adjust its security portfolio in response to anticipated market movements as well as mitigate funding volatility.

KAF IB’s policy of investing in securities with a credit rating of AA- or its equivalent is deemed conservative; for 9MFY2017, about 80.9% of securities consisted of sovereign issuances and PDS with a AAA rating or government guarantees. With the investment bank now being able to hold held-to-maturity financial assets, since June 1, 2017 after a two-year gap, the volatility in the portfolio’s valuation would be reduced. Its Tier 1 capital ratio was strong at 120.5%, well above the Malaysian investment banking industry average of 33.5% as at end-May 2017. KAF IB’s capital quality was strong, mainly consisting of paid-up capital, retained earnings and statutory reserves, making up 95.1% of total capital base.

In FY2017, KAF IB registered an increase in disposal gains on securities to RM76.5 million (FY2016: RM47.8 million) benefitting from the 25 basis point cut in policy rate in July 2016 which allowed for profit-taking opportunities and a reduction in its interest expense. The bank has continued to improve its cost structure, leading to a cost-to-income ratio of 19.7% (FY2016: 24.2%). Its annualised return on assets and return on equity were relatively higher at 1.3% and 8.0% respectively in FY2017 (FY2016: 1.0%; 7.3%). During the review period, KAF IB completed its acquisition of stockbroker KAF-Seagroatt & Campbell Berhad (KAFSC) for RM325.0 million, subsequently delisting it from Bursa Malaysia. As at May 31, 2017, KAF IB owned 98.8% of KAFSC, which generated brokerage fee income of RM29.6 million for the 10-month period since acquisition or about 13.6% of total consolidated income of RM218.1 million in FY2017.

The stable outlook reflects MARC’s expectations that KAF IB will be able to manage credit and market risks in relation to its operations by adhering to a prudent investment policy.


Contacts:
Cheah Wan Kin, +603-2717 2932/ wankin@marc.com.my;
Sharidan Salleh, +603-2717 2954/ sharidan@marc.com.my.