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

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 whose subsidiaries are mainly involved in banking (Hong Leong Bank Bhd), insurance (under HLA Holdings Sdn Bhd) and investment banking (under Hong Leong Capital Berhad). The affirmed ratings are, however, underpinned by the strength of the banking subsidiary Hong Leong Bank Berhad (HLB), which accounted for 93.7% and 90.6% of the group's consolidated operating pre-tax profit and total assets respectively in the nine-month period ended March 31, 2015 (9MFY2015).

MARC views HLB's conservative lending policy, satisfactory capitalisation levels and moderate size as the fifth-largest bank in Malaysia as key rating drivers. HLB maintains a conservative approach to lending with loan growth often lagging industry growth; for 9MFY2015, the bank registered an annualised loan growth of 7.9% (9MFY2014: 6.4%) as compared to the industry average of 9.2%. The bank's focus remains on the retail sector, with loans to the property sector continuing to register strong growth. MARC notes that more than half of the bank's loan book comprises property loans (9MFY2015: 51.7%; FY2014: 48.8%), which raises some concerns on asset quality given the weakening domestic property market conditions. Nonetheless, the gross impaired ratio remained low at 0.90% as at end-March 2015 (FY2014: 1.15%) as compared to the industry average of 1.62%. The bank's comfortable loan loss reserve ratio of 130.2% as at end-March 2015 provides a strong buffer against any asset quality deterioration.

HLB's capitalisation level remained satisfactory with Common Equity Tier 1, Tier 1 and total capital ratios of 9.1%, 10.5% and 13.3%, below the respective industry averages of 12.5%, 13.2% and 15.2% as at end-March 2015. The capital adequacy levels have declined from FY2014 levels on lower internal capital generation and an increase in capital deduction on investment in subsidiaries. The bank has put in place a RM10.0 billion multi-currency qualifying Basel III Tier-2 subordinated debt programme to support its capital position in line with the full implementation of BNM's Basel III capital adequacy framework in 2019. 

For 9MFY2015, HLB's net interest margin was flat at 1.91% despite a marginal increase in net interest income to RM2.0 billion (9MFY2014: 1.92%; RM1.9 billion). The higher net interest income was partly offset by a 3.7% decline in non-interest income due to the impact of unfavourable currency movement. Nonetheless, HLB's pre-tax profit increased by 8.5% y-o-y, benefiting from an impairment write-back of RM71.9 million (9MFY2014: impairment charge of RM34.8 million). The bank continues to demonstrate a strong ability to upstream dividends; for 9MFY2015, HLFG's portion was RM469.0 million (9MFY2014: RM429.0 million), which was sufficient to meet the parent's financial obligations.

HLFG's debt servicing ability will continue to be largely underpinned by the financial performance and dividend upstreaming ability of HLB. At the company level, HLFG received total dividends of RM766.9 million during 9MFY2015 (FY2014: RM473.7 million), including those from HLA Holdings Sdn Bhd and Hong Leong Capital Berhad for the first time in the last five years. It also received a non-recurring dividend arising from the disposal of a portfolio investment. Coupled with continued debt repayment, the group's cash flow coverage measures have improved over the last three years while HLFG's double leverage ratio declined to 105% in 9MFY2015 (FY2014: 109%).

MARC also observes that HLFG's company-level debt-to-equity ratio improved to 0.06x (FY2014: 0.10x) following a reduction in borrowings to RM871.3 million (FY2014: RM1.31 billion). Nonetheless, HLFG remains heavily reliant on short-term funding which comprises 53.4% of total borrowings. This exposes the holding company to liquidity risk, although this risk is mitigated by good access to capital market funding as well as its sizeable unutilised CPs and MTNs of RM1.29 billion.

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; Neoh Jiun Yan, +603-2082 2263/ jiunyan@marc.com.my; Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.

July 24, 2015