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RAM Ratings assigns AA1/Stable rating to Hong Leong Investment Bank’s proposed Tranche 3 subdebt issuance
Published on 07 May 2024.
RAM Ratings has assigned an AA1/Stable rating to the proposed Tranche 3 issuance under Hong Leong Investment Bank Berhad’s (HLIB or the Bank) RM1.0 billion Multi-Currency Tier-2 Subordinated Notes Programme (the Programme). The Programme is an existing facility that is unrated. For added flexibility, the Bank is finalising revisions to the existing principal terms and conditions to allow for the issuance of rated or unrated ringgit-denominated tranches as well as sustainable bond issuances.
The one-notch differential between the rating of the proposed Tranche 3 issuance and HLIB’s AAA long-term financial institution rating reflects the subordination of the subordinated notes to the Bank’s senior obligations.
As the investment banking and stockbroking arm of Hong Leong Financial Group Berhad (HLFG or the Group, last rated AA1/Stable/P1 on 30 August 2023), HLIB is highly strategic to the Group and benefits from a very strong likelihood of support when needed. The Bank can utilise the well-established customer network of Hong Leong Bank Berhad – the commercial banking subsidiary of HLFG – to capitalise on deal referrals and cross-selling opportunities.
Like its peers, HLIB’s earnings are dependent on market conditions and investor sentiment. Its pre-tax profit fell 41% to RM43 mil in FY June 2023 (FY June 2022: RM72 mil), primarily due to weaker brokerage income, in line with the lower trading volumes experienced in the local bourse. Earnings were also weighed down by higher operating expenses. Pre-tax profit however climbed 17% y-o-y to RM28 mil in 1H FY Jun 2024 (1H FY Jun 2023: RM24 mil) following stronger trading activities in the industry with the return of more institutional trades. Investment income also fared better in a more stable interest rate environment after rate hikes ceased.
Two-thirds of the Bank’s financial investments, which make up 74% of total assets, are low-risk government-guaranteed bonds. Gross loans, on the other hand, make up just 7% of total assets and are primarily share margin financing. The credit quality of HLIB’s loan portfolio is pristine with no impairments.
As at end-December 2023, the Bank’s common equity tier-1 capital ratio was 36.5% (end-June 2022: 35.4%). Its sturdy capital position affords a strong loss absorption buffer against the volatility of its earnings.
Analytical contacts
Johan Faizul
(603) 3385 2518
johan@ram.com.my
Wong Yin Ching, CFA
(603) 3385 2555
yinching@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
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