MARC AFFIRMS ITS MARC-1/AA RATINGS ON HONG LEONG FINANCIAL GROUP'S CP/MTN PROGRAMME

Aug 22, 2013 -
MARC has affirmed its MARC-1/AA ratings on Hong Leong Financial Group Berhad's (HLFG) RM1.8 billion Commercial Paper and Medium Term Notes (CP/MTN) programme with a stable outlook. HLFG is the non-operating holding company of a financial services group which holds the fifth largest domestic commercial bank, a leading domestic life insurer and a mid-tier investment bank.
The ratings continue to reflect the bank-centric financial services group's favourable business and financial risk profile. The primary driver of the group's financial strength is the core bank entity, Hong Leong Bank Berhad (HLB), which accounts for the vast majority of the non-operational holding company’s consolidated assets, earnings and upstreamed dividends. Consequently, the risk profile of the group is driven mostly by HLB rather than its insurance and investment banking operations which face relatively higher industry and business risks. HLFG's investment banking and insurance operations represented only 2% and 7% respectively of the group's total consolidated assets as of end-March 2013.
The 64.4%-owned commercial bank contributed RM1.67 billion, or 72% of group pre-tax profit before consolidation adjustments for the nine-month period ended March 31, 2013 (full financial year ended June 30, 2012: 88%). HLB also accounted for 90% of HLFG's consolidated assets as of the same date. HLB's asset quality metrics remain favourable; its balance sheet shows a low gross impaired ratio of 1.37% at end-March 2013 and a very comfortable loan loss coverage ratio of 137%. Slower credit growth for the nine months to March 31, 2013 (9MFY2013) and healthy internal capital generation have allowed the bank to maintain sound regulatory capital ratios, albeit lower than the domestic banking system’s regulatory capital ratios. HLB's strong financial performance and cash flow generation continue to be a primary determinant of HLFG's debt service capacity and refinancing flexibility.
While MARC views positively HLB's increased ability to upstream dividends to HLFG following its merger with EON Bank Berhad, the rating agency is also mindful of the relatively limited diversification of HLFG's dividend streams and the holding company's sensitivity to potential reductions in dividend income from regulated operating subsidiaries owing to their need to maintain appropriate equity capital cushions. The higher regulatory capital requirements under Basel III will likely influence dividend considerations at HLB in coming periods.
Double leverage at the holding company level, which has historically acted as a moderating rating factor, is not expected to increase from current levels. In the near term, MARC does not expect additional debt to be raised at the holding company level to support equity at its indirect insurance and banking subsidiaries. Since MARC's last rating action, HLFG has pared its debt further to RM1.4 billion as of end-March 2013, down from RM1.6 billion a year ago.
The dividend capacity of HLFG's indirect operating subsidiaries is predominantly derived from HLB which provided all of its dividend income in 9MFY2013 and FY2012. HLFG's insurance and investment banking subsidiaries have been relying on internal capital generation in addition to new capital to support their business growth. MARC notes that despite cash outlays on the holding company's investments in subsidiaries which came to RM1.7 billion in FY2012, HLFG was able to deleverage further, aided by the repayment of a RM2.3 billion bridging loan from a subsidiary. The dividends from HLB of RM360.3 million for 9MFY2013 continued to provide for sufficient debt service capacity in addition to funding the holding company's dividends to shareholders of RM135.6 million.
HLFG's affirmed short-term rating of MARC-1 reflects, in addition to the holding company's long-term credit quality, its demonstrated access to debt capital markets. At the same time, MARC notes the holding company's high reliance on short-term borrowings. HLFG's liquidity profile is also supported by RM18.3 million of cash and short-term funds as of end-March 2013, as well as availability of RM1.1 billion under the CP/MTN programme and committed credit facilities as at end-May 2013. The 'MARC-1' short-term rating assumes HLFG will maintain access to capital markets to continuously roll over its commercial paper, and is therefore sensitive to a change in HLFG's market access and/or a change in its overall credit profile.
The stable rating outlook assumes that HLB will maintain 'AA+' financial fundamentals, no material increase in the holding company's double leverage and no meaningful change in the group's risk profile stemming from growth in its non-commercial banking businesses.
Contacts:
Se Tho Mun Yi, +603-2082 2263 / munyi@marc.com.my;
Sharidan Salleh, +603-2082 2254 / sharidan@marc.com.my.