MARC AFFIRMS ITS MARC-1/AA RATINGS ON HONG LEONG FINANCIAL GROUP’S RM1.8 BILLION CP/MTN PROGRAMME

FOR IMMEDIATE RELEASE

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 a non-operating financial holding company where its 64.4%-owned Hong Leong Bank Bhd (HLB) continued to account for a significant portion of the group’s consolidated total assets and profitability. HLFG’s ratings are premised on the financial institution (FI) ratings of HLB, with its long-term rating notched down from the bank’s rating.

The key rating factors underpinning HLB’s FI ratings are its low impairment levels stemming from conservative lending practices and the bank’s sound capital position. HLB’s gross impaired ratio stood at 0.85% as at end-March 2016, significantly lower than the industry average of 1.60%. For 9MFY2016, the bank’s loan growth remained below industry average at 4.9% on an annualised basis (FY2015: 8.4%), reflecting a prudent approach to lending amid slower economic growth. Moderating rating factors are the bank’s relatively moderate size as the fifth largest domestic bank in terms of assets and sector concentration risk arising from exposure to the property sector which accounted for 54.3% of total gross loans as at end-9MFY2016 (FY2015: 52.1%). The concentration risk is mitigated by the considerably low average loan-to-value (LTV) ratios compared to its peers. 

HLB maintains a sound capital position vis-à-vis its low impairment levels: Common Equity Tier 1 (CET1), Tier 1 and total capital ratios stood at 11.9%, 13.0% and 15.9% respectively as at end-March 2016 (end-June 2015: 9.4%, 10.7%; 13.8%). The bank’s capital position benefited from a rights issue of RM3.0 billion in December 2015. Although its CET1 ratio stood below the industry average of 13.0%, it is well above the minimum requirement of 7.0% by 2019. MARC notes that CET1 capital will be moderated by the gradual phase-in of regulatory deductions going forward, though this is expected to be mitigated by internal capital generation and prudent management of risk-weighted assets. HLB’s asset growth has been at single-digit rates; for 9MFY2016, the bank’s total assets grew by 2.0% on an annualised basis to RM163.1 billion.

The bank’s profitability was affected by the challenging operating environment in the banking industry which led to net interest margin compression and increased impairment charges. Coupled with higher operating costs arising from a mutual separation scheme (MSS) exercise, the bank’s pre-tax profit declined by 17.8% y-o-y to RM1.46 billion for 9MFY2016 (9MFY2015: RM1.78 billion). Excluding the one-off cost of RM167.1 million from the MSS, HLB’s pre-tax profit would decline by 8.5% y-o-y. At the HLB group level, income contribution from foreign affiliates has been fairly significant, largely attributed to its share of profits in its 20%-owned Bank of Chengdu Co. Ltd (BOCD) which accounted for about 14.1% of the group’s consolidated pre-tax profit of RM1.66 billion for 9MFY2016 (9MFY2015: 14.7%; RM2.08 billion). MARC notes HLB’s rapid expansion of its overseas operations, particularly in Cambodia. Nonetheless, the group’s loan book exposure from its international operations remained low, accounting for 4.4% of total consolidated gross loans as at end-March 2016 (end-June 2015: 3.7%), indicating that its overseas operations have had minimal impact on HLB’s credit profile to date.  

At the holding company level, HLFG’s debt servicing ability remains largely supported by the dividend upstreaming ability of HLB. Apart from HLB, HLFG receives dividends from its insurance and investment banking subsidiaries, HLA Holdings Sdn Bhd (HLA Holdings) and Hong Leong Capital Berhad (HLC), although their contributions have been small in the past. Therefore, the potential sale of the 70%-held Hong Leong Assurance Bhd and 65%-held Hong Leong MISG Takaful Bhd will not have any material impact on dividend flow.

For 9MFY2016, the banking subsidiary upstreamed a higher dividend of RM496.4 million (9MFY2015: RM469.0 million) which was sufficient to meet the holding company’s financial obligations. HLFG’s total dividend income declined to RM513.5 million in 9MFY2016 (9MFY2015: RM766.9 million) owing to the absence of a non-recurring dividend following an investment disposal and the non-receipt of dividends from HLA Holdings as a result of a change in timing of payment.

MARC notes that HLFG has raised proceeds of RM1.1 billion from a rights issue exercise and approximately RM800.0 million from its credit lines for the capital injection of RM1.9 billion in HLB. Accordingly, HLFG’s double leverage ratio increased to 108% as at end-March 2016 (end-June 2015: 106%), although this is within its rating band. HLFG continued to rely heavily on short-term funding which exposes it to liquidity risk; short-term borrowings accounted for 47.5% of total debts (end-June 2015: 53.4%). Nonetheless, this is largely mitigated by its good access to capital market funding, underpinned by the well-established domestic franchise of its key banking subsidiary.

The stable rating outlook is premised on MARC’s expectations that HLB will maintain a credit profile commensurate with the AA+ rating and the bank’s dividend upstreaming ability will remain strong. The stable outlook also assumes no material change in the group’s risk profile and that HLFG will maintain a manageable leverage position at the company level.

Contacts: Joan Leong, +603-2082 2270/ joan@marc.com.my Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.

August 23, 2016

[This announcement is available in the MARC corporate homepage at http://www.marc.com.my]