MARC ASSIGNS ITS MARC-1/AA RATINGS TO HONG LEONG FINANCIAL GROUP'S PROPOSED RM1.8 BILLION CP AND MTN PROGRAMMES; AFFIRMS ITS MARC-1/AA RATINGS TO RM800 MILLION CP/MTN PROGRAMME; OUTLOOK STABLE

Sep 9, 2011 -
MARC has assigned its MARC-1/AA ratings to Hong Leong Financial Group Berhad’s (HLFG) proposed Commercial Paper and Medium Term Notes programmes with a combined limit of RM1.8 billion. At the same time, MARC has also affirmed the ratings on HLFG’s RM800 million Commercial Paper and Medium Term Notes Programme (CP/MTN) at MARC-1/AA. The rating outlook for the long-term rating is stable. The ratings are based on the continued ability of HLFG’s newly enlarged banking subsidiary, Hong Leong Bank Berhad (HLB), to generate strong earnings, the stable financial and operating performance of its insurance business and the well-capitalised positions of both its banking and insurance subsidiaries. Meanwhile, HLFG continues to benefit from comparatively good access to capital markets which MARC views as important given the financial holding company’s reliance on short-term market funding. Further, HLFG’s cash flow interest coverage remains satisfactory for its rating level on account of the strong dividend support from its core subsidiaries. The aforementioned credit strengths are tempered by the very competitive operating environment of the group’s banking and insurance operations and the structural subordination of debts at the holding company-level relative to creditors of the group’s subsidiaries.

HLB and Hong Leong Assurance Berhad (HLA) are the two main contributors to HLFG’s dividend income. HLB recently completed its acquisition of the assets and liabilities of EON Capital Berhad (EON Cap) (EON Cap acquisition) on May 6, 2011. HLA, on the other hand, merged its general insurance business with MSIG Insurance (Malaysia) Berhad (MSIM) in exchange for a 30% equity stake in the enlarged MSIM. The transfer, which was completed in October 2010, was the result of a strategic partnership between HLFG and Mitsui Sumitomo Insurance Company Limited (Mitsui). The partnership also saw Mitsui acquiring 30% equity interest in HLA for a cash consideration of RM940 million. MARC believes that the strategic partnership has generally positive credit implications for the consolidated credit profile of HLFG by improving the business risk profile of its insurance operations and freeing up capital for redeployment into its commercial banking business. HLA will focus on strengthening its life business with the assistance of its strategic partner.
The cash proceeds from the equity divestment will be used to partly fund the EON Cap acquisition while the remainder would be financed by the proposed new programme. In terms of debt levels, MARC expects HLFG’s company-level gearing to be well within the covenanted 1.5 times limit under the new programme. On a pro-forma basis based on HLFG’s end-March 2011 position, the company-level debt-to-equity (DE) ratio will stand at around 0.73 times, assuming full drawdown of the RM1.8 billion programme. Meanwhile, MARC considers holding company double leverage to be appropriate for its ratings. HLFG’s capacity to honour its financial obligations continues to be a function of its ability to access the capital markets and the cash flow upstreaming capacity of HLB and to the lesser extent, HLA. Both factors have remained supportive of HLFG’s debt service capacity.

The financial profile of HLB is characterised by a high degree of stability, sound asset quality, robust liquidity and satisfactory capitalisation. During the nine month period ended March 31, 2011 (3Q2011) HLB reported a 24.6% increase in pre-tax profit (at the bank level) compared to the preceding year corresponding period. The bank’s asset quality has also continuously improved over the years, with the gross non-performing loans (NPL) ratio improving to 2.0% as at end-March 2011 from 3.3% as at June 2007, a reflection of the bank’s discipline lending approach. Meanwhile, HLB’s capitalisation remains adequate, with HLB’s bank-level total capital adequacy ratio (CAR) at 11.9% as at end-March 2011. Meanwhile, HLA reported higher net profit in FY2010, driven by a substantially higher amount of surplus transferred from its life fund. With the merger of its general insurance business with MSIM’s, HLA’s future earnings performance would primarily reflect that of its life business. Going forward, HLA’s ability to upstream cashflow to HLFG would also depend on the financial and strategic benefits of the partnership with Mitsui, amongst others.

Meanwhile, HLFG’s nine-month results for the period ending March 31, 2011 benefited from several one-off items including a one-time gain of RM619.0 million on the transfer of HLA’s general business to MSIM and a surplus transfer from HLA’s life division of RM175.0 million. At the company level, HLFG’s double leverage ratio improved to 86% at end-9MFY2011 (FY2010: 121%).

Rating stability should be underpinned by continued positive developments in the domestic economic environment and the healthy financial profile of HLFG’s core subsidiaries. MARC expects HLFG to maintain a relatively conservative financial policy with regard to dividends and conservative gearing levels in the near-to-intermediate term.

Contacts:
Ahmad Rizal Farid +603-2082 2253 / arizal@marc.com.my,
Anandakumar Jegarasasingam +603-2082 2250 / kumar@marc.com.my.