FW: MARC AFFIRMS ITS MARC-1/AA RATINGS ON HONG LEONG FINANCIAL GROUP'S RM1.8 BILLION CP/MTN PROGRAMME; OUTLOOK REVISED TO POSITIVE FROM STABLE

 

FOR IMMEDIATE RELEASE

 

MARC AFFIRMS ITS MARC-1/AA RATINGS ON HONG LEONG FINANCIAL GROUP’S RM1.8 BILLION CP/MTN PROGRAMME; OUTLOOK REVISED TO POSITIVE FROM STABLE

 

MARC has affirmed its ratings of MARC-1/AA on Hong Leong Financial Group Berhad's (HLFG) RM1.8 billion Commercial Papers and Medium-Term Notes (CP/MTN) programmes. The outlook has been revised to positive from stable.

 

HLFG’s credit strength is driven by its key subsidiary, Hong Leong Bank Berhad (HLB), given that the bank continued to account for a significant portion of the group’s consolidated total assets, which stood at 89.7% as at March 31, 2017 (9MFY2017). MARC has affirmed its unsolicited financial institution (FI) rating of AA+ on HLB based on the bank’s strong banking franchise, sound capital position and low gross impaired loans (GIL) ratio. HLB is one of the largest commercial banks in Malaysia, with market shares of 8.1% and 8.9% in the domestic loan and deposit markets respectively. MARC has concurrently revised the outlook on HLB to positive from stable to reflect the rating agency’s latest assessment of the bank’s steady financial performance that is underpinned by prudent risk management and conservative lending practices. These factors have enabled the bank to maintain a track record of strong asset quality metrics. The assessment also takes into account the systemic importance of HLB to the domestic financial system.

 

HLFG’s long-term rating is notched down from HLB’s FI rating to reflect the subordination of the parent’s obligations to its subsidiary. HLFG’s other key businesses are insurance and investment banking through its subsidiaries, 100%-owned HLA Holdings Sdn Bhd (HLA Holdings) and 81.3%-owned Hong Leong Capital Berhad (HLC) respectively.

 

For 9MFY2017, HLFG group recorded a lower loan growth of 3.9% y-o-y, which was below the industry average of 6.0%. The lower growth reflects the bank’s conservative lending approach as evident by its focus on selective sectors. In addition, the growth of its residential loan portfolio has continued to moderate in recent years, although overall exposure to the property sector remains high, accounting for 57.4% of total gross loans as at end-March 2017. The concentration risk is mitigated by the property loan portfolio’s low average loan-to-value (LTV) ratio. The rating agency notes HLFG’s GIL ratio has remained fairly low, standing at 0.9% as at end-March 2017 compared to the industry average of 1.6%. Loan loss coverage of 105.6% remains favorable against the industry average of 89.1%. The group’s net interest margin was steady at 1.52%, largely attributed to its stable funding base.

 

During 9MFY2017, the group’s pre-tax profit rose by 19.2% y-o-y to RM2.32 billion (excluding the mutual separation scheme costs in FY2016), of which the commercial banking segment contributed RM1.81 billion. For the insurance operations, pre-tax profit rose to RM194.5 million as a result of lower actuarial reserves arising from higher interest rates, higher gross earned premiums and lower impairment losses on securities.

 

At the holding company level, HLFG’s debt servicing ability remains largely supported by the dividend upstreaming ability of HLB, which upstreamed a higher dividend of RM544.1 million (9MFY2016: RM496.4 million). Coupled with higher dividends from HLA Holdings and HLC, HLFG’s total dividend income grew to RM655.2 million (9MFY2016: RM513.5 million).

 

The positive outlook reflects MARC’s expectation that the rating may be upgraded in the next 12 months if the group maintains its financial metrics.The outlook will revert to stable in the event of a material deterioration in its financial metrics.

 

 

Contacts: Afeeq Amiri, +603-2717 2956/ afeeqamiri@marc.com.my; Sharidan Salleh, +603-2717 2954/ sharidan@marc.com.my.

 

August 17, 2017