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

The ratings are mainly driven by KAF IB’s low-risk business model and its strong liquidity and capitalisation levels that are underpinned by a conservative investment strategy. Moderating the rating is the susceptibility of bank’s performance to capital market conditions and interest rate environment, which have led to earnings volatility. The stable outlook assumes KAF IB will manage its exposure to credit and market risks by adhering to a prudent investment policy.

KAF IB remains focused on trading and investing in money-market and fixed-income securities. Liquidity risk is mitigated by its high liquid asset ratio and prudent investment policy as reflected by liquid asset ratio of 67.3% as at end-February 2020 (2019: 62.6%) and substantial holdings of high credit quality instruments, which made up 74.6% of its investment portfolio. Its business strategy of adjusting its investment portfolio in response to anticipated interest rate movements and mitigate funding volatility has allowed it to remain resilient through economic and interest rate cycles.

For the nine months ended February 28, 2020 (9MFY2020), income rose 60.2% y-o-y to RM201.6 million as the bank took profit on its holdings of debt securities which had seen price increases on the back of sharp cuts in the overnight policy rate. Accordingly, pre-tax profit more than doubled to RM147.3 million while annualised return on assets and return on equity rose to 3.2% and 12.8%. The rating agency views that the accommodative policy stance adopted by the central bank would continue to lend support to bond prices which would in turn offer KAF IB with profit-taking opportunities from its substantial bond portfolio.

KAF IB’s total funding base fell 51.6% y-o-y to RM3.5 billion as at 9MFY2020, as the realisation of capital gains on bond investments led to the decline in funding requirement and subsequent paring down of obligations. Tier 1 and total capital ratios remained strong at 110.0% and 111.3% as at end-February 2020. Its capital continued to comprise quality components – primarily paid-up capital, retained earnings and statutory reserves, all of which made up around 98.8% of the total capital base.

Douglas De Alwis, +603-2717 2965/ douglas@marc.com.my 

Mohd Izazee Ismail, +603-2717 2947/ izazee@marc.com.my