Published on 15 Jan 2021.
RAM Ratings has reaffirmed Hong Leong Financial Group Berhad’s (HLFG or the Group) AA1/Stable/P1 corporate credit ratings (CCRs) and the AAA/Stable/P1 financial institution ratings (FIRs) of its banking entities - Hong Leong Bank Berhad (the Bank), Hong Leong Islamic Bank Berhad (HLISB) and Hong Leong Investment Bank Berhad (HLIB). Concurrently, the ratings of the entities’ sukuk/debt facilities have also been reaffirmed (Table 1). The reaffirmation is anchored by the Group’s strong domestic retail and SME banking franchises. It also factors in our view that the Group’s credit metrics will remain strong despite the economic headwinds posed by the COVID-19 pandemic.
HLFG’s long-term CCR is rated one notch below Hong Leong Bank’s AAA long-term FIR to reflect the Group’s structural subordination as a non-operating holding company and its moderate company-level double-leverage and gearing ratios of a respective 1.05 times and 0.05 times as at end-September 2020. 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, whose ratings are in turn anchored by Hong Leong Bank’s ratings.
Underpinned by its conservative credit culture, Hong Leong Bank’s asset quality is one of the best in the industry. As at end-September 2020, the Bank’s gross impaired loan (GIL) ratio was a low 0.5% (industry: 1.4%) as the automatic six-month moratorium and subsequent Targeted Repayment Assistance programme have helped suppress a spike in credit risk. While we do not dismiss the likelihood of increased delinquencies going forward, Hong Leong Bank is well-positioned to cope with the potential deterioration in view of its robust asset quality. In anticipation of the higher credit risk ahead, the Bank has accumulated substantial levels of pre-emptive provisioning. As a result, credit cost came in higher at 23 bps in FY June 2020 (FY June 2019: 1 bp) and GIL coverage (with regulatory reserves) was reinforced to 295% as at end-September 2020.
Pre-emptive provisioning of RM301 mil and net modification loss of RM142 mil had reduced its pre-tax profit to RM3.0 bil in FY June 2020 (FY June 2019: RM3.2 bil). That translates to a return on risk-weighted assets of 2.2%, lower compared to last year but still considered sound. This was partially backed by stronger earnings contribution of RM642 mil from its 18%-owned associate, Bank of Chengdu. Although its net interest margin had been compressed by multiple overnight policy rate cuts in FY June 2020, Hong Leong Bank has been actively repricing its matured deposits. Lower funding cost had lifted its pre-tax profit to RM890 mil in 1Q FY June 2021 (1Q FY June 2020: RM847 mil) despite another pre-emptive provisioning of RM238 mil. Depending on the evolving economic condition, the Bank might have to make further proactive provisioning that might affect its full year earnings.
Given its strong retail franchise and extensive branch network, the Bank boasts one of the highest proportions of retail deposits in the banking system. Slightly over half of its customer deposits were procured from individuals, compared to the industry average of 38%. Its loans-to-deposits ratio remained comfortable at 84% as at end-September 2020 while its liquidity coverage ratio was also above the regulatory requirement. The Group’s capitalisation and that of its banking subsidiaries were also sound vis-à-vis their risk profiles, with the Group’s common equity tier-1 capital ratio of 11.0% on the same date.
Hong Leong Financial Group Berhad
Corporate Credit Ratings
RM25 billion Multi-Currency Senior Notes, Tier-2 Subordinated Notes, and Additional Tier-1 Capital Securities Programme (2017/2117)*
RM3 billion Commercial Papers Programme (2017/2025)*
*Combined limit of RM25.0 billion
Hong Leong Bank Berhad
Financial Institution Ratings
RM10 billion Multi-Currency Subordinated Notes Programme (2014/2044)
RM10 billion Multi-Currency Additional Tier-1 Capital Securities Programme (2017/2117) ^
^ Programme has a loss absorption feature linked to a non-viability event of the Bank as well as HLFG
Hong Leong Islamic Bank Berhad
RM2 billion Multi-Currency Tier-2 Subordinated Sukuk Murabahah and Additional Tier-1 Sukuk Wakalah (2017/2117) ^^
^^ Programme has a loss absorption feature linked to non-viability events of HLISB, Hong Leong Bank and HLFG
Hong Leong Investment Bank Berhad
Goh Kwan Kheen, Timothy
(603) 3385 2496
(603) 3385 2577
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Rating Rationale: Hong Leong Financial Group Berhad
Rating Rationale: Hong Leong Bank Berhad
Rating Rationale: Hong Leong Islamic Bank Berhad
Rating Rationale: Hong Leong Investment Bank Berhad
Ratings on Hong Leong Financial Group Berhad