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

The affirmed ratings primarily reflect KAF IB’s low-risk business model and strong liquidity and capitalisation levels, underpinned by a conservative investment strategy. The rating is moderated by the susceptibility of KAF IB’s performance to domestic capital market conditions and interest rate environment, which have led to earnings volatility. The stable outlook reflects MARC’s expectation that KAF IB will manage its credit and market risks in relation to its operations and continue to adhere to a prudent investment policy.

KAF IB is one of the largest investment banks in Malaysia based on asset size, with assets of RM9.1 billion as at end-February 2019. The investment bank remains focused on trading and investing in money-market and fixed-income securities, and is largely funded by interbank borrowings and short-term deposits from corporates. Liquidity risk arising from its reliance on short-term wholesale funding is mitigated by its high liquid asset ratio and prudent investment policy. Investments in highly liquid Malaysian sovereign securities, negotiable instruments of deposits (NID) and private debt securities (PDS) accounted for 86.7% of the bank’s total assets. As 85.8% of these investments comprise sovereign issuances and PDS with AAA ratings or government guarantees, credit risk is significantly reduced. KAF IB’s business strategy has allowed it to remain resilient through economic cycles and interest rate movements; it is able to readily adjust its investment portfolio in response to anticipated market movements as well as to mitigate funding volatility.

The investment bank’s Tier 1 and total capital ratios remained strong at 73.5% and 74.4% as at end-February 2019 although they have declined since the previous year (9MFY2018: 130.2%; 131.2%). This was due to an increase in allocation of securities to the trading book, which led to a spike in market risk-weighted assets. The bank’s capital continued to comprise quality components – primarily paid-up capital, retained earnings and statutory reserves. These made up around 89.8% of the total capital base.

For the nine months ended February 28, 2019 (9MFY2019), KAF IB’s income fell 12.2% y-o-y to RM125.8 million (9MFY2018: RM143.2 million). This was partly due to lower brokerage fee income as uncertainty in the global markets put a damper on domestic trading activities. Its brokerage fee income of RM22.2 million comprised 17.6% of revenue (9MFY2018: RM29.5 million; 20.6%). KAF IB’s bond trading segment was affected by a weak domestic bond market amid large net foreign outflows.

KAF IB recorded a decline in pre-tax profit by 16.5% y-o-y to RM71.3 million (9MFY2018: RM85.4 million), and accordingly, its annualised pre-tax profit-to-average assets and pre-tax profit-to-average shareholders’ funds stood lower at 1.1% and 7.1% in 9MFY2019. These metrics remained higher than its peer average. Moving forward, the recent cut in the overnight policy rate, and the dovish stance adopted by global central banks recently will likely continue to lend support to bond prices. This in turn will provide the bank with greater profit-taking opportunities from its substantial bond portfolio.

Contacts:
Douglas De Alwis, +603-2717 2965/ douglas@marc.com.my;
Mohd Izazee Ismail, +603-2717 2947/ izazee@marc.com.my