MARC Ratings has affirmed its financial institution (FI) ratings of AA-/MARC-1 on KAF Investment Bank Berhad (KAF IB) with a stable outlook.

KAF IB’s low-risk business model, underpinned by a conservative investment strategy, and strong liquidity and capitalisation levels remain key rating drivers. The susceptibility of KAF IB’s performance to domestic capital market conditions and interest rate environment, is a key moderating factor. This has been evident in the sharp revenue decline to RM132.6 million (9M2021: RM273.0 million) for 9-month ending on February 28, 2022 (9M2022) as the investment bank faced fewer profit-making opportunities. This is reflected by the decline in gain in trading of securities to RM6.5 million from RM63.1 million. Coupled with lower net interest/profit income of RM71.1 million, pre-tax profit fell to RM64.0 million (9M2021: RM207.3 million).

We continued to note that KAF IB maintains strong capitalisation levels; its total capital ratio stood at 110.5% as at end-9M2022. The investment bank remains mainly focused on trading and investing in the money market and fixed-income securities, funded largely via interbank and short-term deposits from corporates. As at end-9M2022, sovereign issuances and private debt securities (PDS) with a AAA rating or government guarantee accounted for 90.2% of the investment bank’s investment portfolio, reflecting its conservative investment strategy.

In April 2022, a consortium led by KAF IB was awarded a digital banking license under the Islamic Financial Services Act 2013. KAF IB will allocate RM120.0 million as an initial investment for the digital bank with the expected commencement of business in 12-15 months. While this is in developmental stage, MARC Ratings views that on a longer term the digital banking business would cushion KAF IB’s
earnings volatility.