MARC has affirmed its long-term and short-term financial institution (FI) ratings of A+ and MARC-1 on Kenanga Investment Bank Berhad (Kenanga) with a stable outlook.

The affirmed ratings are primarily premised on Kenanga’s strong competitive position in the retail stockbroking business in Malaysia, its healthy capital position, its moderate profitability metrics and adequate funding profile. The stable outlook reflects MARC’s expectation that Kenanga will maintain its key financial metrics that are commensurate with the ratings.

Kenanga’s strong stockbroking franchise is reflected by its retail market share of 20.7% in 1Q2019 (2018: 20.6%) which has largely been built on the back of a wide branch network and a sizeable remisier base. Apart from stockbroking fees, the bank generates interest income from its loan portfolio, comprising mainly share margin financing, which stood at RM2.0 billon as at end-1H2019.

In 1H2019, total income declined marginally to RM218.9 million (1H2018: RM221.4 million) mainly on lower brokerage fees. Its high cost-to-income ratio of 95.3% is largely due to substantial commission expenses and costs of maintaining its branch network. During this period, Kenanga recorded net profit of RM13.4 million (1H2018: RM18.6), aided by higher credit loss reversals. The bank’s trading gains, brokerage fees and fee income from investment banking activities remain susceptible to capital market conditions which would continue to pose earnings volatility. Its consolidated Common Equity Tier 1 (CET1) ratio declined to 20.4% (1H2018: 22.8%) largely due to higher risk-weighted assets arising from larger equity exposure. Its CET1 ratio, however, remains well above the minimum regulatory requirement.

In terms of funding and liquidity profile, Kenanga relies on short-term wholesale customer deposits, with deposits from non-bank FIs and business enterprises collectively accounting for 59.2% of total liabilities as at end-June 2019. The high funding concentration poses some liquidity risk to the bank, although this is mitigated by sizeable liquid assets comprising 38.2% of total assets. Liquidity coverage ratio stood at 153.5% in 1Q2019, higher than the minimum 100% requirement.