[BWBB 2013 BANK MANAGEMENT BY MOHAMAD HELMI] March 14, 2013

Table of Contents
INTRODUCTION.................................................................................................................... 2 PRELIMINARY ................................................................................................................... 2 HONG LEONG BANK BERHAD HISTORY .................................................................. 3 METHODOLOGY .................................................................................................................. 5 DATA SOURCE ................................................................................................................... 5 EVALUATING TECHNIQUE ........................................................................................... 5 RESULT AND ANALYSIS ..................................................................................................... 7 RESULT ................................................................................................................................ 7 ANALYSIS............................................................................................................................ 8 A. RETURN ON ASSET (ROA) ................................................................................... 8 B. RETURN ON EQUITY (ROE) ................................................................................ 9 C. NET INTEREST MARGIN ................................................................................... 11 FINDING............................................................................................................................. 13 CONCLUSION AND RECOMMENDATION ................................................................... 13 CONCLUSION ................................................................................................................... 13 RECOMMENDATION ..................................................................................................... 14 REFERENCES ....................................................................................................................... 15

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[BWBB 2013 BANK MANAGEMENT BY MOHAMAD HELMI] March 14, 2013 INTRODUCTION

PRELIMINARY Based on (Rasidah Mohd Said & Mohd Hanafi Tumin, 2011) Banks, as the critical part of financial system, play an important role in contributing to a countrys economic development. If the banking industry does not perform well, the effect to the economy could be huge and broad. Due to the U.S. sub-prime mortgage crisis that happened recently, the banking sectors of many countries suffer huge losses, especially U.S. and E.U. The poor performance of the banking industry has slowed down the U.S. economy and also the growth of global economy until current period. One of the root causes is the poor lending policies and decisions made by U.S. banks like Citibank, Wells Fargo and so on. In Asia, although the losses in banking sectors are not as serious as U.S., it is also hurting the economy. For this reason Bank Management BWBB2013 for second session 2012/2013 has given student an individual assignment that should finish at the end of 15th March 2013. This assignment is asked student to make an analysis about commercial bank performance for 2010 until 2012. The objective of this assignment: i. Make student know how to using Information and Communication Technologies (ICTs) to present data in simple way. ii. Make student know how to applied a theory learn in classes been applied in real life. iii. Prepare student with the job prospective after graduate in Universiti Utara Malaysia.

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[BWBB 2013 BANK MANAGEMENT BY MOHAMAD HELMI] March 14, 2013 To accomplish this assignment, I have chosen Hong Leong Bank Berhad to study their performance during period 2010 until 2010. This analysis can be done by choosing any three of financial ratio that I learn in class for example market share ratio, return on asset ratio, return on equity, net margin interest and so on. After finish evaluating Hong Leong Bank performance, the last step I must make a conclusion and recommendation about this bank performance for the period 2010 until 2012. HONG LEONG BANK BERHAD HISTORY Hong Leong Bank Berhad is a public listed company on Bursa Malaysia and a member of the Hong Leong Group Malaysia. Headquartered in Malaysia, the group has been in the financial services industry since 1968 through Dao Heng Bank Ltd. in Hong Kong. Hong Leong Bank started the business in Kuching, Sarawak since 1905 under name of Kwong Lee Mortgage and Remittance Company. At 1934, Kwong Lee Mortgage and Remittance Company has incorporated as Kwong Lee Bank Ltd. and in 1989, it was renamed MUI Bank through Hong Leong Financial Group Berhad. In 2004, the finance company business of Hong Leong Financial Group Berhad was acquired by Hong Leong Bank.

The successful of Hong Leong Bank continue in 2011 after the merger with EON Bank Group, this merger effectively transforms the Bank into a banking group that have more than RM140 billion in asset and an expanded network of 329 branched nationwide. Today Hong Leong Group Malaysia is one of the largest business group in Malaysia and internationally. The strong foundation and solid growth of the Group is attributed to the Power of Vision the Vision of its Chairman and Chief Executive Officer, Tan Sri Quek Leng Chan is manifested and entrenched in the Group's corporate culture, which is firmly rooted on the Group's core values of Quality, Entrepreneurship, Innovation, Honour, Human Resource, Unity, Progress and Social responsibility. Page | 3

[BWBB 2013 BANK MANAGEMENT BY MOHAMAD HELMI] March 14, 2013

TOTAL ASSET AND EQUITY

TOTAL ASSET Thousands 200,000 150,000 100,000 50,000 0 2010 2011 Year's 2012 5,815 77,730 6,567 87,650 10,099 140,285 TOTAL EQUITY

RM '000

Figure 1.0: Hong Leong Bank asset and equity performance

Based figure 1.0, we can see in 2012 Hong Leong Bank total asset is increasing very impressive that is 160.01% compare to 2011 that only 112.76%, the question is how Hong Leong Bank asset became largest in that year? As we mention early in introduction. On May 2011, EON Bank has been taken over by Hong Leong Bank (San Ong, Ling Teo & Heng Teh, 2011) after merger with EON Bank Hong Leong Bank acquired EON Capital for RM5 06 billion in May making it the fourth-largest banking group in Malaysia with combined assets of more than RM140 billion (Wei Lian, 2011). From this view, we can say merger with EON Bank is the best decision made by Hong Leong Bank to become the largest banking group.

However, is that the Hong Leong Bank performance increase as the total assets number increasing? For this reason we will conduct an external performance to evaluating Hong Leong Bank performance for 2010 to 2012. In evaluating Hong Leong Bank performance our main focus is return on assets (ROA), return on equity (ROE) and net interest margin.

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[BWBB 2013 BANK MANAGEMENT BY MOHAMAD HELMI] March 14, 2013 METHODOLOGY

DATA SOURCE In order to make an analysis, the data is collected from www.bursamalaysia.com and the data that is collected is about annual report from 2010 to 2012, from the data the most important part is financial statement. In financial statement is consist balance sheet (financial position), income statement, statement of change in equity and cash flow statement (appendix 1.0) and lastly the data also collected from Hong Leong Bank website that is www.hlb.com.my at here major of data about history of the business, type of product and services, latest news and so on. Based on table 2.0, its shown the Summary of Hong Leong Bank asset, equity, revenue, expenses and income, basically this data is the most important and useful data to evaluating Hong Leong Bank performance from 2010 until 2012.

Table 2.0: Summary of Hong Leong Bank asset, equity, revenue, expenses and income DATA/YEAR TOTAL ASSET 77,730,208 87,650,089 140,284,562 TOTAL EQUITY 5,815,063 6,567,126 10,098,511 NET INCOME 767,817 807,493 1,247,280 INTEREST INCOME 2,592,586 2,952,529 5,493,832 INTEREST EXPENSES 1,209,792 1,501,193 2,942,252

2010 2011 2012

EVALUATING TECHNIQUE In evaluating Hong Leong Bank Performance, the focus is more to external performance because this data will be useful for investor, stockholder, government and public. Based on (Kumbirai & Webb, 2010) the variable that we can use to measure bank performance is profitability performance, liquidity performance and credit performance. To be more specific this paper will focus on evaluating profitability analysis or profitability ratio. Page | 5

[BWBB 2013 BANK MANAGEMENT BY MOHAMAD HELMI] March 14, 2013 Profitability Analysis/Profitability Ratio Profitability ratio is the most common measure of bank performance. There have several of profitability ratios but the focus is more to return on assets (ROA). A. Return on Assets (ROA) = net profit/total assets This ratio is primary an indicator of managerial efficiency and it shows the ability of management to acquire deposits at a reasonable cost and invest them in profitable investments. Besides that, this ratio also indicates how much net income is generated per of assets the higher the ROA, the more the profitable the bank (Kumbirai & Webb, 2010). B. Return on Equity (ROE) = net profit/total equity Based on (Kumbirai & Webb, 2010) ROE is the most important indicator of banks profitability and growth potential. It is the rate of return to shareholder or the percentage return on each RM of equity invested in the bank. ROE is the return the company's shareholders receive on their invested capital. Practically, ROE is directly related to the company's profitability. A negative ROE, such as those in companies B, D and F, indicates negative (loss) profitability from operations. Improvement in the after-tax profit margin will help to increase this percentage (Mohd Suberi, Mastura, Omar & Md. Shariff, 2012) C. Net Interest Margin = (interest income from loan and security investments interest expense on deposits and other debt issued)/ total asset Based on (Brophy, 2010) the net interest margin, also sometimes referred to as the net yield on interest-earning assets, is usually defined as tax-equivalent net interest income and divided by average interest-earning assets. The margin is calculated for a period of time, a quarter or a year, and is expressed as a percentage. Page | 6

[BWBB 2013 BANK MANAGEMENT BY MOHAMAD HELMI] March 14, 2013 RESULT AND ANALYSIS

This section focuses more to present, analyse and discuss the result about Hong Leong Bank performance for three years. RESULT

RETURN ON

RETURN ON EQUITY (ROE) ,

NET INTERERT MARGIN = . % = . = . %

RATIOS/YEAR
ASSETS (ROA) , = . % = . % = . %

= 2010

= . %

= 2011

= . %

= 2012

= . %

Table 3.0: Summary of Hong Leong Bank external performance Based on table 3.0, its show the summaries of Hong Leong Bank external performance in term of profitability performance focus on return on assets (ROA), return on equity (ROE) and net interest margin. Besides that, all the result that we get is in term of percentage. To explain each result very specific we will move the most important section that is analysis section

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[BWBB 2013 BANK MANAGEMENT BY MOHAMAD HELMI] March 14, 2013

ANALYSIS

A.

RETURN ON ASSET (ROA)

RETURN ON ASSETS (ROA)

1 0.98 0.96 0.94 0.92 Return On Assets % 0.9 0.88 0.86 0.84 0.82 0.99

0.92 0.89

RETURN ON ASSETS (ROA)

2010

2011 Year's

2012

Figure 3.0: Hong Leong Bank Return on Assets (ROA) performance Figure 3.0 shows Hong Leong Bank performance in term of return on assets (ROA) in trends 2010 to 2012. Basically, in 2010 the chairmans was said in the annual report of 2010 about the improved of their return on asset compare to the last year. In 2009 Hong Leong Bank ROA is about 0.92%, but in 2010 the ROA is increasing to 0.99%, meaning that for each 1 ringgit of assets, Hong Leong Bank can generated 0.99% income and this clearly shows what the Chairmans Statement.

But in the next year which is 2011 the ROA is decreasing to 0.92% and is fall about 0.07%, the reason why a decrease in ROA is happened in 2011 we still dont know because the chairmans never give an opinion about this matters in annual report of 2011. The fall in ROA continues in year 2012 which the ROA became 0.89, but this time the percentage of decreasing in ROA is lower than last year.

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[BWBB 2013 BANK MANAGEMENT BY MOHAMAD HELMI] March 14, 2013 Last year the percentage of decreasing was 0.07%, but this year the percentage is only 0.03%, this show what chairmans statement in the annual report of 2012 which the ROA improved to 1.1%i and we believe this problem started happened when Hong Leong Bank merger with EON Bank in 6th May 2011. A merger with EON Bank has make Hong Leong Bank became the fourth-largest banking group in Malaysia in term of total asset, because of this ranked Hong Leong Bank still didnt have enough time to make an adjustment between net income and total assets.

In chairmans statement in annual report of 2012 has said While the merger activities are on track and the synergies achieved above planned target, we are aware that there is still much to do. To create sustainable value for all our stakeholders, we continue to focus on improving efficiency across the board to drive synergies, customer fulfilment and business momentum, maximise return on assets, execute branch rationalisation programmes, as well as strengthen integrated risk and capital management. B. RETURN ON EQUITY (ROE)

RETURN ON EQUITY (ROE)

13.4 13.2 13 12.8 Return On Equity 12.6 (%) 12.4 12.2 12 11.8 2010 2011 Year's 2012 13.20

12.30

12.35 RETURN ON EQUITY (ROE)

Figure 3.1: Hong Leong Bank Return on Equity (ROE) performance

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[BWBB 2013 BANK MANAGEMENT BY MOHAMAD HELMI] March 14, 2013 Figure 3.1 shows Hong Leong Bank performance in term of return on equity (ROE) in trends 2010 to 2012. Basically, the performance of Hong Leong ROE is fluctuated among the years. Based on annual report 2010 Hong Leong Bank performance in that year was the best performing mid-size commercial bank, the brand value is more than 3 times larger than other mid-size banks. From the report also the chairmans said in July 2010, The Edge Billion Ringgit Club awards programme recognising the biggest and best companies on Bursa Malaysia saw Hong Leong Bank achieving a top 5 ranking for the Finance sector in all 3 categories highest compound growth in pre-tax profit over 3 years, highest return on equity over 3 years and highest returns to shareholders over 3 years. Notably, Hong Leong Bank was the only commercial banking group to be placed in the top tier against financial services groups and insurance companies.

On the other side, Hong Leong Bank ROE performance in 2011 is fallen dramatically became 12.3% and its about 0.9% drop. In chairmans statement on annual report 2011 he said this year was the second year of global economic recovery turned out to be an economic quagmire for some western economies. While the emerging economies and in particular Asia had largely led the recovery in this region, we are not insulated from the global headwinds that are the consequence of western economies teetering on the edge of double-dip recession besides that the chairmans also stated that From the downgrade of the US sovereign credit rating by S&P, to the Eurozone debt crisis and Middle East geopolitical tensions, and to the earthquake that shook Japan and rising food prices, we are reminded of the need to understand, manage and respond to the complexity of risks that are ever greater than before. This is a period for unprecedented pace of change based on this statement it clearly show why in 2011 the ROE in fallen dramatically.

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[BWBB 2013 BANK MANAGEMENT BY MOHAMAD HELMI] March 14, 2013 After merger with EON Bank on 6th May 2011, the condition of Hong Leong Bank change which is, in 2012 the ROE has increasing about 0.05% and became 12.35% compare to last year was 12.30%, this clearly show the decision made by chairmans is the best move on future-proofing the sustainability of the bank. Besides that, chairmans statement on annual report 2012 has said The merger of Hong Leong Bank Group with EON Bank Group has enhanced our franchise value as a leading domestic bank in Malaysia. This has been largely accomplished through increased synergies from the enlarged franchise, growth and embedment of our position as a relevant, dynamic and competitive Asian bank to meet the rapidly evolving needs of our customers from this statement it show that the transformation made by Hong Leong Bank. C. NET INTEREST MARGIN

NET INTERERT MARGIN

1.85 1.80 1.75 Net Interest Margin 1.70 (%) 1.65 1.60 1.55 2010 2011 Year's 2012 1.82 1.78

1.66

NET INTERERT MARGIN

Figure 3.2: Hong Leong Bank Net Interest Margin performance Figure 3.2 shows Hong Leong Bank performance in term of net interest margin in trends 2010 to 2012. Basically in 2010 the interest margin is 1.78% and its decrease from last year that is 1.92%, meaning that last year Hong Leong Bank generated 1.92% income based on interest, but this year Hong Leong Bank only can generated 1.78% income based on interest. Page | 11

[BWBB 2013 BANK MANAGEMENT BY MOHAMAD HELMI] March 14, 2013

Year

INTEREST INCOME 00 2,592,586 2,952,529 5,493,832

CHANGE IN INTEREST INCOME -13.28% 12.19% 46.26%

INTEREST EXPENSES 000 1,209,792 1,501,193 2,942,252

CHANGE IN INTEREST EXPENSES -30.59% 19.41% 48.98%

NET INTERERT MARGIN 1.78% 1.66% 1.82%

CHANGE IN NET INTERERT MARGIN -0.08% -0.07% 0.09%

2010 2011 2012

Table 3.1: Summary of Hong Leong Bank interest performance The decreasing in net interest margin continues in 2011, which is the net interest margin became 1.66%, but in this year the percentage of decreasing is lower than last year. Based on table 3.1, last year the net interest margin was decreasing about 0.08% compare to 2011 that only decrease about 0.07%, meanwhile in 2010 the interest income was decrease about 13.28% but in 2011 the interest income increase about 12.19% and in 2010 also the interest expenses was decline dramatically about 30.59% but in 2010 the interest expenses rose by 19.41%, this clearly show even the net interest margin is fall in 2011 but the performance of interest expenses and income is increase compare to 2010.

In 2012, an impressive growth in net interest margin Hong Leong Bank, which is the net interest margin increase about 0.09% and beat last two years net interest margin that was 1.78% and1.66% became 1.82%. An increasing in net interest margin 2012 is due to the rose of increase in interest income from RM 2,952,529,000 to RM 5,493,832, 000 and is about 46.26% increase. Besides that, an increase in interest expenses also the cause to increasing in net interest margin, basically in 2011 the interest expenses was RM 1,501,193,000 and increasing about 48.98% became RM 2,942,252,000. On the other side, a merger between

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[BWBB 2013 BANK MANAGEMENT BY MOHAMAD HELMI] March 14, 2013 Hong Leong Bank and EON Bank also can categories as a factor of rising in net interest margin. FINDING Based on our result and analysis it shows at the end of 2010 Hong Leong Bank performance starting fall and it became worst at beginning of 2011. After Hong Leong Bank merger with EON Bank on 6th May 2011, Hong Leong Bank performance slowly became good.

CONCLUSION AND RECOMMENDATION

CONCLUSION

This report is evaluating the performance of Hong Leong Bank as a commercial banking sector over the period 2010-1012. The results indicate that Hong Leong Bank performance in terms of profitability has been fluctuated since 2010 to 2012. In 2010, Hong Leong Bank gained return on assets (ROA) has an improvement while, return on equity (ROE) was the best in the history of Hong Leong Bank. Meanwhile, the net interest margin was fallen compare to last year. Next in 2011 the condition of Hong Leong Bank was very bad, whereas the ROA, ROE and net interest margin is fall because of the downgrade of the US sovereign credit rating by S&P, to the Eurozone debt crisis and Middle East geopolitical tensions, and to the earthquake that shook Japan and rising food prices. To avoid the condition became worse Hong Leong Bank came up with plan by merger with EON Bank. A merger with EON Bank was the best decision made by chairmans whereas the performance in 2012 almost all the profitability ratios became stable and increase, whereas the decreasing in ROA became smaller than last year, the ROE have an a improvement and the net interest

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[BWBB 2013 BANK MANAGEMENT BY MOHAMAD HELMI] March 14, 2013 margin dramatically rise after fallen in last year. Based on this report, making an investment in Hong Leong Bank is the best move to investor, RECOMMENDATION As we mention early merger with EON Bank was the best move of Hong Leong Bank to become the largest bank. But today became a banking institution is very difficult because Banking institution have so many regulation and compliance. For this reason Hong Leong Bank must have a preparation and so many plans to become a leader in banking institution. In my opinion the next step that maybe Hong Leong can make is merger or joint venture with one of international banking in America to make Hong Leong Bank massive in this banking industry.

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[BWBB 2013 BANK MANAGEMENT BY MOHAMAD HELMI] March 14, 2013 REFERENCES

Brophy, T. (2010, August 03). Investment Education. Retrieved March 12, 2013, from Value Line: http://www.valueline.com/Tools/Educational_Articles/Stocks_Detail.aspx?id=9211 Kumbirai, M., & Webb, R. (2011, December). A financial Ratio Analysis of Commercial Bank Performance in South Africa. Journal compilation, 2(1), 30-53. Retrieved March 10, 2013, from http://www.studymode.com/essays/A-Financial-Ratio-

Analysis-Of-Commercial-1312087.html Mohd, S. A., Mastura, J., Omar, O., & Md. Sharif, H. (2012). Financial Ratio Analysis: An Assessment of Malaysian Contracting Firms. Journal of Construction in Developing Countries, 1, 71-78. Retrieved March 10, 2013, from

web.usm.my/jcdc/vol17_s1_2012/Art%205_jcdc17-s1.pdf Ong, T. S., Teo, C. L., & Teh, B. H. (2011, November). Analysis On Financial Performance And Efficiency Changes Of Malaysian Commercial Banks After Mergers And Acquisitions. International Journal of Business and Management Tomorrow, 1(2), 116. Retrieved March 10, 2013, from www.ijbmt.com/issue/71.pdf Rasidah, M. S., & Mohd, H. T. (2011, March). Performance and Financial Ratios of Commercial Banks in Malaysia and China. International Review of Business Research Papers, 7(2), 157-169. Retrieved March 10, 2013, from

unpan1.un.org/intradoc/groups/public/.../apcity/unpan049143.pdf

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[BWBB 2013 BANK MANAGEMENT BY MOHAMAD HELMI] March 14, 2013 Wei, L. L. (2011, July 01). About Us: Business. Retrieved March 11, 2013, from The Malaysian Insider: http://www.themalaysianinsider.com/business/article/hong-leongeon-merger-complete-from-today Annual Report of Hong Leong Bank June 2010 Annual Report of Hong Leong Bank June 2011 Annual Report of Hong Leong Bank June 2012

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