Management Discussion & Analysis


We are pleased to present the Management Discussion and Analysis (“MD&A”) for the financial year ended 30 June 2019 (“FY19”). In this report, we would like to provide a review of our Group’s business operations and financial performance during FY19.

In summary, the Group recorded a net profit attributable to shareholders of RM1.92bn for the financial year ended 30 June 2019, contributed by business momentum from our commercial banking, insurance and asset management businesses. Our results were achieved with prudent operating metrics and we continue to make progress in strengthening our various business franchises towards the objective of achieving long-term sustainable growth.

HLFG GROUP PERFORMANCE HIGHLIGHTS
Hong Leong Financial Group Berhad (“HLFG”) is an investment holding company and has three core businesses in the group:

  • Commercial banking under Hong Leong Bank Berhad (“HLB”).
  • Insurance and Takaful, housed under our insurance holding company HLA Holdings Sdn Bhd (“HLAH”); and
  • Investment banking and asset management, housed under Hong Leong Capital Berhad (“HLCB”).

HLFG’s net profit attributable to shareholders increased by 1% year-on-year (“yoy”) to RM1.92bn in FY19. This is flat to last year mainly due to a lower total income of RM5.28bn as compared to RM5.35bn in FY18. The lower total income in FY19 was mainly attributed to Net Interest Margin (“NIM”) pressures at our commercial banking business although HLB had registered a higher than industry average loan growth of 6.6% yoy. Correspondingly, our Return on Equity (“ROE”) was 10.4%, a decrease from 11.1% in FY18. Company level borrowings increased slightly from RM1.39bn (30 June 2018) to RM1.45bn as at 30 June 2019. The Company had also issued RM400 million of Additional Tier 1 capital securities and RM1.1bn of Tier 2 Subordinated Notes on a back-to-back basis during the year whereby HLFG had subscribed to an equivalent amount of capital securities from our banking subsidiaries besides issuing its own capital securities to the market.

The capital issuances are in accordance with Bank Negara Malaysia’s (“BNM”) Capital Adequacy Framework and in line with our capital plans. We continue to manage our capital position to place us in a strong judicious position since the full implementation of the Basel III Capital Adequacy Framework for Financial Holding Companies beginning 2019.

HLFG’s book value per share increased from RM15.55 as at 30 June 2018 to RM16.78 as at 30 June 2019. During the year, RAM Rating Services Berhad (“RAM”) assigned AA1/P1 Corporate Credit Ratings (CCRs) to HLFG. Concurrently, RAM also maintained the long-term Financial Institution Ratings of HLB at AAA in recognition of its superior asset quality. All the above long-term ratings have a stable outlook. In January 2019, Moody’s Investors Services Ltd upgraded HLB’s baseline credit assessment (“BCA”) to a3 from baa1 on the back of the Bank’s improved asset quality and strong capital. The upgrade is also an affirmation of the Bank’s strong funding and liquidity positions.

Dividend per share increased to 42 sen in FY19 from 40 sen in FY18. While we increased shareholders’ return, we are also mindful of managing our capital position given the full implementation of the Basel III Capital Adequacy Framework for Financial Holding Companies in 2019.

COMMERCIAL BANKING FINANCIAL & OPERATIONAL REVIEW

HLB Financial Highlights
Pretax Profit

HLB’s regional financial services are provided via:

  • A branch in Singapore;
  • A branch in Hong Kong;
  • 100%-owned commercial bank Hong Leong Bank Vietnam Limited;
  • 100%-owned commercial bank Hong Leong Bank (Cambodia) PLC;
  • 12%-owned consumer finance associate Sichuan Jincheng Consumer Finance Limited Company;
  • 18% equity interest in the Bank of Chengdu Co., Ltd; and
  • A representative office in Nanjing China.

HLB made RM2,665 million in net profit, sustaining its growth momentum in FY19. The performance was largely driven by robust loan growth alongside an improved asset quality although its NIM was impacted by margin and funding pressures, not helped by a 25 bps Overnight Policy Rate (“OPR”) cut during the year. The result was also supported by a higher associate contribution from the Bank of Chengdu, where its profits grew 7.4% yoy to RM554 million, representing 17.4% of the Bank’s pretax profit.

HLB’s total income for FY19 was RM4,726 million, mainly upheld by higher Islamic Banking income, which increased 9% yoy Contribution from net interest income and non-interest income were lower than previous year:

  • Net interest income for FY19 moderated to RM3,392 million, on the back of elevated funding cost pressure during the year and a 25 bps OPR cut in May 2019. Consequently, NIM for the year fell to 1.96%.
  • Non-interest income stood at RM1,334 million, with non-interest income ratio being recorded higher at 28.2%. This is attributed to higher foreign exchange profits and gains on the divestment of its joint venture.

Cost/ Income ratio increased to 44.3% in FY19, but remained at the lower end of the industry range.

Core business performance indicators remained positive, with gross loans growing better than industry at 6.6% yoy to RM138bn as at 30 June 2019 together with continued stringent credit controls. Residential mortgages increased 9.9% yoy to RM67.4bn, while loans to small and medium enterprise (‘SME”) grew 5% yoy to RM21.5bn. An encouraging SME segment of Community SME Banking grew 40.1% yoy to RM5.2 bn. The Bank’s total assets stood at a record RM207.4bn.

Customer deposits increased by 3.6% yoy to RM163bn as at 30 June 2019, achieved amidst an increasingly competitive environment for deposits. This translates to a Loan/Deposit (“L/D”) ratio of 84.4% and a loan to fund ratio of 88.3%, which places HLB in a comfortable liquidity position.

Asset quality and provisioning remained sound, with a gross impaired loan (“GIL”) ratio of 0.78% and loan impairment coverage at 118% as at 30 June 2019. Inclusive of additional regulatory reserves set aside, HLB’s coverage ratio increased to 197% as at 30 June 2019.

HLB’s capital position remained robust, especially after the issuance of Additional Tier 1 capital securities and Tier 2 Subordinated Notes during the year, with Common Equity Tier 1, Tier 1 and Total Capital Ratios at 13.1%, 14.1% and 16.3% respectively as at 30 June 2019.

HLB raised its total dividend from 48.0 sen per share last year to 50.0 sen per share in FY19, translating to better cash flows for HLFG. HLB’s dividend payout ratio is at 38%.

Personal Financial Services ("PFS")
PFS remained the largest contributor to HLB, making up 53% and 33% of its revenue and pretax profit, respectively. For FY19, PFS retained its strong momentum, achieving good volume growth across most loan products while gaining market share in its key segments, namely mortgage, auto and unsecured loans. Asset quality remained solid and stable as reflected by a low GIL ratio of 0.63%. This was mainly achieved through lower impaired loans in the auto and unsecured segments as we took on board higher quality customers.

PFS recorded a yoy loan growth of 6.7% which outperformed the industry, predominantly led by a growth in mortgages and unsecured loans. Our mortgage business recorded a strong loan growth of 8.3% yoy against an industry growth of 6.5% despite the stagnant property market, supported by the Bank’s balanced growth agenda with a focus on sustainable and quality loan origination. The Bank broadened its penetration into more affordable housing segments, which led to residential property loan growth increasing by about 10% for the year. Sales acceptance of properties valued between RM250,000 and RM500,000 recorded significant growth of 25% yoy.

In line with the focus to originate quality loans while deepening our market coverage, we continue to support home ownership programmes, with 63% of total approvals extended to customers who do not have a housing loan as per their Central Credit Reference Information System (CCRIS) data. The Bank’s market share expanded as a result of these efforts. Moving forward, the business will continue to innovate to better serve customers, developers and property market intermediaries. In this context, collaborative efforts are underway with several PropTech and FinTech players to improve the property buying and financing process for consumers.

The auto financing business experienced an unprecedented year, as the automotive industry benefited from record sales with the removal of the GST in June 2018. However, given the one-off nature of this removal, we have not stood still and started to build strategic partnerships with key brands to better understand their dealers’ needs and facilitate win-win opportunities. This allowed us to increase our loan disbursement by more than 30% yoy. Our service and turnaround time to customers continue to improve as we embark on improving our digital capabilities to simplify processes and customer experience.

The Bank’s personal loans base grew 8% yoy on the back of stable impairments and a marked increase in sales activity from our digital channels. We continue to see our digital initiatives as a differentiator in offering an easy and convenient way to apply for small personal loans, which has resulted in sales from digital channels more than doubling during the year. Loan applications from our online Connect channel was one of the main growth contributors.

Business & Corporate Banking (“BCB”)
BCB performed strongly this FY19, registering revenues and pretax profit at RM1.2bn and RM828 million respectively. This represents a 25% and 26% contribution to the Bank’s total income and pretax profit.

Building on last year’s business performance, BCB loans grew a solid 6% yoy, outpacing the industry average, spurred by our focus on the commercial segment and strategic Community SME client segment, which grew a respective 11% and 40% yoy.

Our corporate Current Account balances are also in healthy shape, registering growth of 8% yoy, a larger increase compared to last year’s performance and outperforming the industry’s demand deposit growth rate.

Global Markets (“GM”)
The Global Markets business is present in five countries – Malaysia, Singapore, Hong Kong, Vietnam and Cambodia – serving as a key product partner for the Bank’s clients. The core products that allow us to offer comprehensive solutions to our clients include Foreign Exchange, Fixed Income, Derivatives and Structured Products. The GM business also offers shariah-compliant products and manages the Bank’s excess liquidity and capital through investments in Fixed Income and Money Market instruments.

The Global Markets business performed admirably for the year with revenues and pretax profit at RM517 million and RM407 million respectively. This represents an 11.2% and 12.8% contribution to the Bank’s total income and pretax profit, respectively, for FY19.

GM’s focus for the year has been on improving our digital offerings especially in forex execution through e-channels. We have endeavoured to give our retail and corporate customers a seamless remittance experience through enhanced cash management and online remittance systems. GM is also working with FinTechs to transform our customer’s remittance experience, in line with changing customer behaviour and preferences. Leveraging on the transformation of our branch locations and distribution network, we achieved strong momentum in branch and SME forex revenues, and increased deal activity from our Financial Institutions/Government-Linked Corporations segments.

Islamic Banking
In FY19, Hong Leong Islamic Bank Berhad (“HLISB”) performed strongly with pretax profit increasing 16.5% over the previous year. ROE and ROA continued its upward trajectory to 14.0% and 1.02% respectively from 13.2% and 0.94% last year.

The growth in earnings was in tandem with the enlarged financing business supported by robust cost management and increase in operating efficiencies. Our operating expenses remained stable with the CIR at 29.9%, which is markedly lower than last year’s 32.1%.

HLISB achieved some significant milestones in the digital transformation of its Islamic banking services and products. During the year, HLISB launched the Term Investment Account-i, a first-to-market investment product that can be fully subscribed online. HLISB also added a new e-channel for personal financing to be performed via In-Branch tablets at branches. The initiatives not only improved efficiency but also enhanced the flexibility and digital capability of the products offering. The digital offerings were expanded to include broader market segments as well such as Islamic wealth management and business banking.

HLISB continues to focus on financing growth in the SMEs segment. To achieve this objective, HLISB has been working closely with government agencies such as TERAJU, SME Corporation and Credit Guarantee Corporation Malaysia. As part of its strategic plan, HLISB continued its partnership with SME Corporation under the Shariah-compliant SME Financing Scheme (SSFS) to provide financing assistance to eligible SMEs involved in Shariah compliant business activities.

 

INSURANCE/TAKAFUL FINANCIAL & OPERATIONAL REVIEW

HLFG’s 100%-owned subsidiary, HLA Holdings Sdn Bhd (“HLAH”) is the insurance holding company of the Group. HLAH holds:

  • 70% equity interest in life insurance company Hong Leong Assurance Berhad (“HLA”);
  • 30% equity interest in general insurance company MSIG Insurance (Malaysia) Bhd (“MSIG”);
  • 65% equity interest in Family Takaful operator Hong Leong MSIG Takaful Berhad (“HLMT”);
  • 100% equity interest in Hong Kong general insurance company Hong Leong Insurance (Asia) Limited (“HLIA”); and
  • 100% equity interest in Singapore general insurance company HL Assurance Pte. Ltd. (“HLAS”).

For FY19, HLAH recorded a net profit of RM275 million, lower by 3.3% yoy. Whilst HLA registered a higher 5% yoy net profit, the decrease in HLAH’s results was due to a lower contribution from HLMT with pretax profit decreasing 36% yoy to RM10.4 million. Our full year share of MSIG’s pretax profit also decreased by 10.3% yoy to RM57 million in FY19 mainly due to higher net claims and lower underwriting margins for the year arising from the follow on effects of fire and motor detariffication. The detariffication effects are expected to stabilize going forward.

Life Insurance
HLA, as a life insurer, is the largest operating business within our insurance division, comprising over 80% of total HLAH insurance pretax profits. HLA’s net profit increased 5% to RM221 million in FY19, mainly due to better actuarial surplus distribution from its Par fund and higher investment surpluses. The results also reflect the continued execution of our strategy to enhance our agency and bancassurance distribution channels, as well as targeting to drive our New Business Embedded Value (“NBEV”) through a more profitable product mix.

HLA’s gross premiums remained at the RM3bn mark for the year, achieved amidst a tougher business environment as well as a greater focus on Non-Participating policies. HLA achieved new business regular premiums (“NBRP”) of RM546 million in FY19. We continue to make good progress in growing our Non-Participating and Investment Link new business premiums at over 90% of new business premiums. This is important to our efforts to create higher NBEV for our life business. HLA’s NBEV showed a 14.7% yoy growth in FY19.

After establishing ourselves within the Ordinary Life segment and having built up a sizeable distribution capability, our focus has been on driving and improving the profitability levers of the company. This strategy is being executed via a greater focus on Non-Participating policies as well as concentrating on the Investment-Linked segment, which has yielded positive results. Within the Investment-Linked segment, we maintained our No. 4 position in 2018, by the same metric.

In terms of distribution, HLA continues to execute its Bancassurance Plan, which aims to leverage off the distribution network of its sister company, HLB’s 250 over branches. Over the last 8 years, HLA has increased its Non-Agency (Bancassurance) market share of NBRP from 4.9% in 2010 to 9% in the first half of 2019.

HLA is presently the largest domestic insurer as well as the No. 4 insurer amongst all local and foreign life insurers in Malaysia, as measured by new business annualised regular premiums. HLA’s management expense ratio was 6.3% in FY19, the lowest amongst the major domestic life insurers.

In recognition of its performance, HLA has been awarded the prestigious Domestic Life Insurer of the Year at the Asian Banking and Finance Insurance Asia Awards 2018. It was awarded to HLA for rising above challenges and for its initiatives in the Malaysian domestic insurance market. During the same period, HLA has also been accorded the Malaysia Best Life Insurance Company 2018 by International Finance.

Takaful
HLMT is the Takaful operating company in our Group. With effect from 1 July 2018, HLMT converted its composite license to a Family only Takaful license and ceased taking on new general Takaful business to focus on the Family Takaful business. During the financial year, HLMT’s operator’s fund recorded a topline growth of 3% yoy with a revenue contribution of RM63.4 million. However, its lower pretax profit of RM10.4 million versus last year was due to higher reinvestment in its operational and business capabilities for the future. HLMT remains focused on improving its performance through its agency and bancassurance channels whilst embedding value based intermediation initiatives in its plans.

Overseas General Insurance
We have two overseas general insurance companies in the Group, namely HLIA in Hong Kong and HLAS in Singapore. Both are niche general insurer operators which started in the personal lines segments using online channels and call centers. Their online channels new business premiums grew by 13% yoy and 55% yoy respectively for HLIA and HLAS during the year. HLIA’s net profit grew by 5% yoy to RM13.7 million for FY19. HLAS started underwriting more commercial lines business during the last few years which carries a high initial reserving in its books. In FY19, HLAS recorded a loss of RM15.9 million due to high commercial lines reserving costs which are expected to reverse out subsequently upon normalization with actual claims experience.

INVESTMENT BANKING FINANCIAL & OPERATIONAL REVIEW

Hong Leong Capital Berhad (“HLCB”) is an investment holding company of the investment banking, stockbroking and asset management business group under HLFG. HLCB’s two key operating subsidiaries are 100%-owned Hong Leong Investment Bank Berhad (“HLIB”) and 100%-owned Hong Leong Asset Management Berhad (“HLAM”). HLIB provides a full range of investment banking services encompassing debt capital markets, equity capital markets and Treasury & Markets, while stockbroking services are provided through branches and Hong Leong Hubs within Malaysia. HLAM provides asset management services.

HLCB faced a challenging year, with slower corporate activities in the face of weakened equity and capital markets. Net profit decreased 5% yoy from RM71 million in FY18 to RM68 million in FY19.

As part of the Group’s commitment to provide a reasonable return to our shareholders, HLCB is recommending a final dividend of 22.0 sen per share for FY19 which is 15.8% higher than the dividend payout for the previous financial year.

Investment Banking (“IB”)
The Investment Banking business achieved a revenue of RM65 million and a pretax profit of RM25 million in FY19. Treasury and Markets (“T&M”) was the largest contributor to the IB Division, contributing 57% of total IB Division revenue, ahead of Equity Markets and Debt Markets, which contributed 20% and 18% of division revenue respectively. T&M ended the year on a higher note recording an increase in revenue of 24% in FY19 despite the challenging market condition brought about by the uncertainties over the global trade tension and Brexit.

The Equity Markets and Debt Markets divisions continue to operate under very challenging conditions, with significantly reduced capital raising activities throughout the financial year. However, the Equity Markets division managed to register a good growth in revenue of 134% yoy in FY19. The significant growth was largely attributable to higher underwriting and placement fee income from Initial Public Offerings (“IPOs”) exercises completed during the financial year. Local demand for most of the recently completed IPOs as evidenced by the subscriptions from both institutional and retail investors, remained strong.

Stockbroking (“SB”)
The stockbroking business of HLIB achieved a revenue of RM73 million and a pretax profit of RM23 million in FY19. Brokerage income accounted for 71% and 76% of total revenue earned by the stockbroking business in FY19 and FY18 respectively. The net brokerage income earned in FY19 is 20% lower than the previous financial year. Our drop in revenue was in line with the lower turnover recorded by Bursa Malaysia. More specifically, Bursa Malaysia’s traded volume dropped 14.2% to RM552bn from RM643bn in FY18. Our share of the market was slightly lower than the previous financial year mainly due to higher foreign participation recorded in Bursa Malaysia, a business segment which HLIB has minimal presence.

Asset Management
HLAM continued to show a strong growth in profits, up 80% yoy. Our Asset Management business achieved this impressive growth on the back of a 46.2% yoy increase in revenue, attributable mainly to growth in our average assets under management (“AUM”) and higher management fee margins for FY19. The average AUM grew by 15.9% to RM17.5 bn in FY2019. Amidst the subdued market conditions, our investors continued to favor money market funds, albeit we also recorded growth in AUM for our fixed income, equity and balanced funds and private mandates.

HLAM received four Lipper fund performance awards during the year, namely Hong Leong Dividend Fund (won 2 awards under Equity Malaysia Income – Malaysia Pension for 3 and 5 years), Hong Leong Penny Fund and Hong Leong Balanced Fund (Mixed Asset MYR Bal).

RISKS
The Group is exposed to credit, market, operational, liquidity, legal and compliance risks. We have processes and controls in place to ensure these risks are adequately managed. These risks and our controls are spelt out in the Statement on Corporate Governance, Risk Management and Internal Control of this annual report.

PROSPECTS
Looking ahead in the immediate term, we remain cautious on the Malaysian economy, amidst a challenging business environment and increased external uncertainties. In the long term, the economic fundamentals of the country remain solid and the prospects promising, given the prudent and supportive policies of the government. This will provide a conducive and sustainable operating environment for the financial services industry.

We will continue to pursue our plans to grow our core businesses of Commercial Banking, Islamic Financial Services, Insurance, Investment Banking, Stockbroking and Asset Management whilst taking appropriate steps to judiciously control our expenses and reinvest effectively, especially in the digital space.

Our key strategic objective remains the pursuit of long-term sustainable growth. We are committed to diligently execute our business and digital strategies to build sustainable value for our shareholders. We will continue to manage the businesses prudently, advancing on multiple fronts, creating incremental business value whilst laying the foundations for an increasingly digitalised business environment.

FURTHER INFORMATION
For further information on our subsidiaries, please refer to:

APPRECIATION

Last but not least, we would like to take this opportunity to express our gratitude to the Board of Directors for their support and guidance, the management, colleagues and staff throughout the HLFG Group for their dedication and commitment.

Our sincere appreciation also goes out to the regulators, government authorities, shareholders, customers and business partners as well as to the community we serve for their continued faith and confidence in Hong Leong Financial Group.