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RAM Ratings affirms ratings of Hong Leong Financial Group and banking entities
Published on 30 Aug 2023.
RAM Ratings has affirmed 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). The issue ratings of the entities have concurrently been affirmed.
We have also assigned ratings of AAA and P1 to the proposed Commercial Papers and Medium-Term Notes Programmes, to be established under both HLBB and HLISB (Table 1). The ratings reflect the facilities’ ranking as senior unsecured obligations of both entities.
The affirmation of the existing ratings, meanwhile, is premised on HLFG’s established domestic franchise in the retail and small & medium enterprise markets and the Group’s excellent asset quality. The one-notch differential between HLFG’s long-term CCR and the long-term FIRs of its subsidiaries is indicative of the Group’s structural subordination as a non-operating holding company. HLBB is the Group’s main banking subsidiary while HLISB and HLIB play strategic roles as its Islamic and investment banking arms, a key consideration in their ratings.
HLFG’s asset quality has held up well after the expiry of relief measures, its gross impaired loan ratio ticking up mildly to 0.52% as at end-March 2023 (end-June 2022: 0.49%; industry: 1.7%) due to delinquencies in its SME and commercial portfolios. Credit cost was benign in 9M FY Jun 2023 at below 10 bps.
HLFG’s relatively stable earnings over the years have been supported by low impairment charges and a contained operating cost. Its net interest margin narrowed to 1.72% in 9M fiscal 2023 (fiscal 2022: 1.79%), compressed by an increased funding cost. However, overall profitability was lifted by a revival of investment income and insurance earnings as well as a stronger contribution from associate, Bank of Chengdu Co. Ltd (BoCD). These translated to an improved return on assets and return on risk weighted assets of 1.8% and 3.4%, respectively, in 9M FY Jun 2023 (FY Jun 2022: 1.7% and 3.2%).
Adding unaudited net profit from the latest quarter, HLFG’s common-equity tier-1 (CET-1) capital ratio came up to 11.9% as at end-March 2023 (end-June 2022: 11.8%). HLBB, meanwhile, swapped part of the convertible bonds issued earlier by BoCD into equity in December 2022 and the remainder in May 2023. The circa 40-bp capital impact from the latter is expected to be largely absorbed by earnings growth and an improved fair value reserve. We anticipate the Group’s CET-1 capital ratio to remain slightly below 12%, at the lower end of the spectrum relative to other banking groups.
Table 1: Ratings of HLFG, HLBB, HLISB and HLIB
Analytical contacts
Amy Lo
(603) 3385 2509
amy@ram.com.my
Johan Faizul
(603) 3385 2518
johan@ram.com.my
The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.
RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.
Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.
Published by RAM Rating Services Berhad
© Copyright 2022 by RAM Rating Services Berhad
Rating Rationale: Hong Leong Financial Group Berhad
Rating Rationale: Hong Leong Bank Berhad
Rating Rationale: Hong Leong Islamic Bank Berhad
