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

The ratings incorporate KAF IB’s strong capitalisation and liquidity levels, underpinned by a conservative investment strategy. The long-term FI rating is moderated by the susceptibility of KAF IB’s performance to domestic capital market conditions and interest rate environment, which have led to earnings volatility.

KAF IB has a low-risk business model given its focus on trading and investing in money market and fixed-income securities, funded largely via interbank and short-term deposits from corporates. Its steady performance over the years has been attributed to its ready adaptability to adjust its investment strategy to be in sync with prevailing market conditions.

For the nine months ended February 28, 2023 (9MFY2023), revenue expanded by 59.6% y-o-y to RM211.7 million, attributed largely to gains from trading of securities which offset the lower net interest income of RM56.9 million (9MFY2022: RM71.1 million). Pre-tax profit increased sharply to RM148.3 million from RM71.3 million in FY2022. Return on assets and return on equity grew to 4.27% and 11.04%.

Capitalisation levels were strong with Common Equity Tier 1, Tier 1 capital and total capital ratios at 137.3%, 137.4% and 138.5% (2022: 99.9%, 100.0% and 100.9%). The improved capitalisation levels were largely on the back of reduced fixed income securities held, thus lower risk-weighted assets of RM824 million (2022: RM1.0 billion). KAF IB’s capital mainly consisted of paid-up capital, retained earnings and statutory reserves, accounting for 99.1% of its total capital base of RM1.4 billion as at end-9MFY2023 (2022: 99.1%). KAF IB’s sound liquidity position, with a liquid asset ratio of 97.8%, provides ample headroom to help mitigate any funding volatility.

Against a backdrop of a high interest rate environment, KAF IB is likely to expand its sovereign and high-quality private debt securities (PDS) holdings. Its conservative investment strategy is reflected in its investment portfolio that primarily comprises sovereign issuances and AAA-rated or government-guaranteed PDS (90.4% of its investment portfolio).

In April 2023, KAF IB’s subsidiary, KAF Seagroatt & Campbell Berhad, entered into a conditional Share Purchase Agreement with CIMB Investment Bank Berhad, for the latter to acquire a 100% stake in KAF Equities Sdn Bhd. MARC Ratings understands that the proposed acquisition involves an indicative cash consideration of RM147.9 million subject to, among others, certain price adjustments at the completion date as well as terms and conditions of the SPA. The acquisition is expected to be concluded in 4Q2023 subject to regulatory approvals. Brokerage income contributed to around 13% on average of KAF IB’s total revenue for the past four years (2019-2022). Given the relatively small contribution, MARC Ratings views that the disposal of the subsidiary would have minimal impact on KAF IB’s financial performance moving forward.

KAF IB also has an 80%-interest in a consortium that holds a digital banking licence in Malaysia. Towards this end, it intends to invest — during the consortium’s initial five-year foundational period — some RM120 million, including for the minimum capital requirement of RM100 million. The digital banking business is expected to commence in 1Q2024 and will have minimal impact on KAF IB’s existing operations.