Monday, October 17, 2016

MARC AFFIRMS FINANCIAL INSTITUTION RATINGS OF AA-/MARC-1 ON KAF INVESTMENT BANK



MARC has affirmed the long-term and short-term financial institution ratings of AA-/MARC-1 on KAF Investment Bank Berhad (KAF Investment). The outlook on the ratings is stable. The ratings are mainly driven by the investment bank’s strong capital position, healthy liquidity levels and prudent investment policy. The ratings are moderated by KAF Investment’s susceptibility to domestic capital market conditions and the interest rate environment that would lead to a high degree of earnings volatility.

As at end-February 2016 (9MFY2016), KAF Investment’s total assets stood at RM7.0 billion, down from RM9.9 billion as at end-May 2015, following the full disposal of its negotiable instruments of deposits (NID) amounting to RM4.2 billion. Part of the proceeds from the NID disposal was channelled into longer-tenure securities including Malaysian sovereign securities and PDS, which collectively rose to RM5.8 billion as at end-9MFY2016 from RM3.3 billion as at end-FY2015. MARC notes that the investment bank’s ability to readily adjust its fixed-income securities portfolio and deposit-taking activities in response to anticipated market movements has remained key to its profitability.

For 9MFY2016, KAF Investment recorded revenue of RM124.5 million and pre-tax profit of RM98.1 million on the back of higher disposal gains on securities which offset the marginally lower net interest income and Islamic banking income (9MFY2015: RM88.5 million; RM67.6 million). The higher profit was also due to a receipt of RM18.0 million from a one-off litigation recovery arising from interest compensation on defaulted bonds. MARC views that the recent decrease in the overnight policy rate and, consequently, lower market rates could provide opportunities for capital gains in the current financial year. However, given the lower reinvestment rate and lower asset size, interest income would be affected. KAF Investment’s cost-to-income ratio improved to 21.2% (9MFY2015: 23.6%) while the bank’s annualised return on assets (ROA) and return on equity (ROE) were relatively higher at 1.2% and 10.5% in 9MFY2016 (9MFY2015: 0.8%; 5.9%).

MARC notes that KAF Investment’s reduced asset size has led to lower risk-weighted assets, which in turn has increased the bank’s Tier 1 capital ratio and total capital ratio to 177.8% and 179.1%, well above the Malaysian investment banking industry average of 33.8% and 34.2% respectively as at end-February 2016. The investment bank is in the midst of completing its acquisition of KAF-Seagroatt & Campbell Berhad (KAFSC) for cash consideration of RM325.0 million. KAFSC was majority-owned by KAF Investment’s indirect and direct shareholders, AKKA Sdn Bhd and AKKA Holdings Berhad respectively. As at end-July 2016, KAF Investment has acquired 97.4% of KAFSC. While the acquisition will consolidate group-wide entities under KAF Investment, MARC opines it does not materially change the investment bank’s credit profile given the modest earnings contribution from KAFSC of about 6.0% based on combined earnings as at 9MFY2016.
The stable outlook reflects MARC’s expectations that KAF Investment will be able to manage its credit and market risks in relation to its operations by adhering to a prudent investment policy.          
  

Contact: Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.

October 17, 2016

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