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.
October 17, 2016
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