Published on 26 Aug 2022.
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 (HLBB), Hong Leong Islamic Bank Berhad (HLISB) and Hong Leong Investment Bank Berhad (HLIB). Concurrently, the issue ratings of the entities have been reaffirmed (Table 1).
The reaffirmation of the ratings is premised on the Group’s strong domestic retail and small-medium enterprise banking franchises. Given its disciplined underwriting and strong collection procedures, we expect HLFG’s asset quality to stay excellent, even after considering some possible deterioration.
The one-notch differential between HLFG’s long-term CCR and the AAA long-term FIRs of its banking subsidiaries reflects HLFG’s structural subordination as a non-operating holding company and its moderate debt load at the company level. HLBB is the key contributor to HLFG while HLISB’s and HLIB’s ratings consider their strategic roles as the Group’s Islamic and investment banking arms.
Underpinned by a conservative credit culture, HLFG’s asset quality is among the best in the industry. A low gross impaired loan (GIL) ratio of 0.48% as at end-March 2022 gives the Group considerable headroom to cope with risks arising from the expiry of most relief measures in 1H 2022 and fresh macroeconomic headwinds both domestically and globally. Despite potential asset quality slippages, we do not expect the Group’s GIL ratio to be materially worse off than the pre-pandemic level of around 0.8% (as at end-June 2019). The Group’s Malaysian operations under HLBB saw financing under forbearance plans fall to around 4% as at end-April 2022 (end-December 2021: 21%). Delinquencies post-assistance are likely to be manageable in view of the early encouraging repayment trends for expired relief loans so far.
HLFG’s common equity tier-1 (CET-1) capital ratio is at the lower end of the spectrum compared to other major banking groups. In March 2022, HLFG’s subsidiary, HLBB, subscribed to its share of the RMB8 bil convertible bonds issued by Bank of Chengdu Co. Ltd (BoCD, the Group’s 18%-owned associate in China). If the rights to convert the bonds into equity are exercised, the Group’s pro forma CET-1 capital ratio could drop to 11.2% (adjusted to include unaudited net profit from the latest quarter), widening the capitalisation gap between the Group and its peers. That said, we do not view this as a concern at this juncture given its overall low risk profile and strong loan loss reserve coverage of above 200%. In addition, HLBB’s - its main banking subsidiary – adjusted CET-1 capital ratio is at a healthy level of 13.3%.
HLFG’s pre-tax profit for FY Jun 2021 outperformed pre-pandemic levels at RM4.0 bil and is on track to reaching another record in FY Jun 2022. Pre-tax profit for 9M FY Jun 2022 came in at RM3.5 bil, translating to a respective return on assets and return on risk-weighted assets of 1.7% and 3.1% (FY Jun 2021: 1.5% and 2.8%). The increase was driven by significantly lower provisions, net interest income growth and stronger contributions from BoCD. These factors offset the effects of poorer trading and investment income during the period. Slightly broader margins expected from the recent series of rate hikes and benign credit losses should support continued profit improvements. Potential writebacks of the Group’s sizeable management overlays – if asset quality risks prove manageable in the next few quarters – provide further upside to earnings.
By virtue of a strong retail franchise and extensive branch network, HLFG boasts one of the largest proportions of retail deposits in the industry. Deposits from individuals constituted half of HLFG’s total deposits as at end-March 2022 (banking system: 37%). Its loans to deposits ratio stayed comfortable at 84% 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 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)
Hong Leong Islamic Bank Berhad
RM2 billion Multi-Currency Tier-2 Subordinated Sukuk Murabahah and Additional Tier-1 Sukuk Wakalah (2017/2117)
Hong Leong Investment Bank Berhad
(603) 3385 2509
Lee Yee Von
(603) 3385 2503
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Rating Rationale: Hong Leong Financial Group Berhad
Rating Rationale: Hong Leong Bank Berhad
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Rating Rationale: Hong Leong Investment Bank Berhad
Ratings on Hong Leong Financial Group Berhad