RAM reaffirms AAA ratings of Hong Leong banking entities, AA1 rating of HLFG

KUCHING: RAM Ratings has reaffirmed the AAA/Stable/P1 financial institution ratings (FIRs) of Hong Leong Bank Bhd, Hong Leong Islamic Bank Berhad (HLISB) and Hong Leong Investment Bank Bhd (HLIB).

“Concurrently, we have reaffirmed the AA1/P1 corporate credit ratings (CCRs) of Hong Leong Financial Group Berhad (HLFG),” it said in a note. “The reaffirmations are anchored by Hong Leong Bank’s sustained track record of excellent asset quality across credit cycles and the Bank’s respectable domestic retail and SME franchises.

“HLFG’s long-term CCR is rated one notch below the AAA longterm FIR of Hong Leong Bank to reflect the Group’s structural subordination as a non-operating holding company and its moderate company-level double leverage and gearing ratios.”

The reaffirmation of HLISB’s and HLIB’s ratings is premised on their strategic roles as the respective Islamic and investment banking arms of the group, which in turn are anchored by Hong Leong Bank’s ratings.

“As part of a larger universalbanking group, HLISB and HLIB significantly leverage on its parent’s branch network, distribution channels, treasury function and risk management systems,” RAM added.

“Backed by a conservative credit culture, Hong Leong Bank has maintained a solid set of assetquality indicators. Over the years, the Bank has consistently kept its asset quality better than that of the broader banking industry.

“Its gross impaired loan (GIL) ratio of 0.81 per cent as at endSeptember 2018 remained superior to the industry’s 1.51 per cent. Additionally, the bank’s credit cost ratio came up to a benign 6 bps in FY18 and 1QFY19 while its GIL coverage ratio of 200 per cent (including regulatory reserves) is among the strongest in the domestic banking industry.”

Despite a relatively thin net interest margin, RAM saw that Hong Leong Bank continued to boast healthy profitability, with a record-high pre-tax profit of RM3.2 billion in FY18.

Stronger income from treasury activities and lower loan- loss provisioning had offset heftier operating expenses for marketing and digitalisation initiatives.

Significantly improved contributions from its 18 per cent-owned associate, Bank of Chengdu, had also supported the Bank’s better profit performance, resulting in a higher return on risk-weighted assets of 2.6 per cent in FY18.

Hong Leong Bank’s robust funding and liquidity position is underpinned by its expansive base of customer deposits. The Bank boasts one of the highest proportions of retail deposits in the industry, which adds diversity and stability to its funding profile.

“The bank’s capitalisation levels are healthy, with respective fully loaded common equity tier-1 and total capital ratios of 12.4 per cent and 16.1 per cent as at endSeptember 2018.”