This article first appeared in The Edge Financial Daily on November 3, 2017 - November 9, 2017

KUALA LUMPUR: RAM Rating Services Bhd (RAM Ratings) has upgraded the long-term financial institution ratings (FIRs) of Hong Leong Bank Bhd and its Islamic and investment banking arms, from AA1 to AAA, with a stable outlook.

“The upgrading of the ratings is primarily anchored by Hong Leong Bank's sustained track record of excellent asset quality across credit cycles, robust funding and liquidity position, and respectable domestic retail and SME franchises,” said the ratings agency in a statement yesterday.

It kept its short-term ratings on all three banks — Hong Leong Bank, Hong Leong Islamic Bank Bhd, and Hong Leong Investment Bank Bhd — unchanged at P1.

As for Hong Leong Financial Group Bhd, the ratings agency has assigned it an AA1/P1 corporate credit rating, which is a notch below the AAA long-term FIR of Hong Leong bank, due to the group’s structural subordination as a non-operating holding company.

RAM Ratings noted that despite a substantial exposure to the property sector, Hong Leong Bank has “consistently kept its asset quality among the best in the banking industry”. It said the bank’s gross impaired loan ratio stood at 1% as at end-June, which is also superior to the industry’s 1.6%.

“The bank's loss-absorption buffers, which are among the strongest in the industry, provide an ample cushion against any unanticipated deterioration in its portfolio," it said.

Hong Leong Bank’s pre-tax profit grew to RM2.7 billion in 2017 from RM2.4 billion in 2016, driven by stronger contributions from its 20%-owned Bank of Chengdu, and the absence of mutual separation scheme related expenses, which it booked in 2016.

The bank also has a “healthier” net interest margin, as lower funding costs boosted the bank's return on risk-weighted assets to 2.2% in 2017, compared with 2% the year before.

Hong Leong Bank’s loan-to-deposit ratio of 80% also allows room for ample growth, and remains favourable compared with its peers at 89%. It has the highest proportions of retail deposits in the industry, at 56%, compared with the industry's 38%, it said.

“Meanwhile, the bank's capitalisation levels are healthy, with respective fully loaded common-equity tier-1 and total capital ratios of 12.7% and 15.8% as at end-June 2017. Hong Leong Bank remains well poised to weather any potential slippage in its credit profile and additional provisions related to MFRS 9,” it added.