On behalf of the Board of Directors, I am pleased to present our Annual Report and Audited Financial Statements of Hong Leong Financial Group Berhad (“HLFG” or “the Group”) for the financial year (“FY”) ended 30 June 2022.
NAVIGATING A COMPLEX ECONOMIC LANDSCAPE
The year under review has been fraught with challenges from the effects of a prolonged pandemic and the unprecedented floods that affected various parts of the country. The Group successfully navigated these challenges while supporting our customers who were in need of assistance and delivering a commendable set of results for our shareholders.
During the financial year, the revival in the global economy was hobbled by emergent strains of COVID-19, supply chain related disruptions, heighten inflationary pressures and volatility in the financial markets as interest rates rose at a rapid pace in some advanced economies. These were further exacerbated by the outbreak of Russian-Ukraine war that threatened food and energy security and as a consequence, the cost of raw materials was further inflated. On the domestic front, Malaysia’s economy was on the mend as the nation entered transition to the endemic phase on 1 April 2022 with the reopening of international borders. This has led to a positive trajectory in external trade and improving domestic demand. The economy expanded by 8.9% on a year-on-year (“y-o-y”) basis in the second quarter of 2022, albeit from a low base. Malaysia’s inflation rate remained relatively benign from the effects of various government subsidy mechanisms that has shielded our domestic consumers from the full extent of cost pressures. Nevertheless, domestic inflation has trended higher with the Consumer Price Index registered an increase of 4.4% y-o-y in July 2022. This would increase the cost burdens for both consumers and businesses alike.
REVIEW OF THE YEAR’S PERFORMANCE
For the year under review, we have successfully weathered the challenges to deliver a commendable set of results. HLFG recorded a net profit attributable to shareholders (“PATAMI”) of RM2,452 million, 8.3% higher than the preceding financial year. Excluding the one-off impact of Cukai Makmur (“Prosperity Tax”), our PATAMI would have been higher by 17.2% y-o-y. HLFG’s earnings per share in FY2022 improved to 216.3 sen, from 199.8 sen in the previous financial year. The return on equity remained at 10.4%, while net assets per share rose 6.4% from RM20.13 to RM21.41. In FY2022, the Board of Directors has declared a final dividend of 31 sen per share and combined with the interim dividend of 15 sen per share paid on 30 March 2022, the total dividend for FY2022 is 46 sen per share, higher than last year by 6 sen for a total dividend payment of RM528 million.
Our key operating company, Hong Leong Bank Berhad (“HLB”) recorded a net profit of RM3,289 million, an increase of 15.0% y-o-y supported by top-line growth, prudent cost control, lower loan impairment allowances and robust contributions from associates. The commercial banking business remains in a healthy state underpinned by our strong fundamentals, disciplined management of asset quality and strong growth in loans and financing that enabled us to deliver a set of robust performance. HLB continued to strategically invest in digital solutions to expand its capabilities to meet the evolving needs of the customers. The Bank has also reorganised its teams to give the wealth management business a sharper focus in growing its non-interest income base.
Our Islamic banking business, Hong Leong Islamic Bank Berhad (“HLISB”) saw encouraging asset and deposit growths of 14.4% and 10.3% respectively, while profit before zakat and taxation was recorded at RM438.5 million as compared to RM524.4 million in the preceding year, impacted by higher provisions during the year. HLISB has strengthened their Islamic banking coverage through digitalisation, simplification of customers’ experience with innovative Islamic financial solutions and broadening access to the non-Muslim community.
For the Life Insurance business, Hong Leong Assurance Berhad’s (“HLA”) reported net profit of RM257 million was relatively flat on y-o-y basis as Customer-facing activities of our agency force was curtailed as a precautionary health measure in the beginning of the financial year. HLA’s gross premium grew by 1% y-o-y to RM3,170 million while our New Business Embedded Value (“NBEV”) trended higher by 13.1% y-o-y to RM200 million, largely driven by the positive impact on higher long term MGS rates and refinement in actuarial methodology. Our focus is to accelerate product innovation by leveraging on technology and data to transform our value proposition and to rejuvenate our agency recruitment.
Our Family Takaful business, Hong Leong MSIG Takaful Berhad (“HLMT”) continues its strong growth trajectory with a gross contribution of RM544 million in FY2022, improving against last year by 61.9%. As a result, HLMT’s industry market share on an annual contribution equivalent basis grew to 8.4% from 2.2% in 2017. Over the 5 years, gross contribution from the agency channel grew by 8.5 times underpinned by new product innovation and robust agency recruitment. HLMT complements our Financial Group’s Islamic financial service franchise and offers attractive growth potential given that Takaful in Malaysia remains largely underpenetrated.
Outside Malaysia, HL Assurance Pte Ltd in Singapore delivered a 37% higher gross premium than previous year resulting in a 46% y-o-y growth in underwriting profit. Hong Leong Insurance (Asia) Limited in Hong Kong, however recorded a marginally lower gross premium than previous year due to strict COVID-19 related travel restrictions.
Hong Leong Capital Berhad (“HLCB”) reported a lower net profit of 64.4% y-o-y to RM72 million, largely due to a decline in profit contribution from Hong Leong Investment Bank (“HLIB”) that was affected by delayed completion of mandated-deals and significantly lower traded volume on Bursa Malaysia. Our fund management business under Hong Leong Asset Management Berhad (“HLAM”) recorded an increase in profit after tax by 2.3% to RM19.0 million amidst tough investment market conditions. In FY2022, HLAM continued to deliver impressive fund performance by winning 20 individual Refinitiv Lipper Fund Awards for Malaysia Universe and Global Islamic. The team has also won the Best Equity Group - Malaysia Provident, which is a highly coveted award.
STRENGTHENING OUR FOUNDATIONS
The Group’s philosophy embodies an entrepreneurial vision focused on building long-term sustainable value for all its stakeholders. This vision guides our operating businesses to remain relevant, trustworthy, progressive, competitive and sustainable in pursuit of growth and the creation of business value. We believe the key to ensuring sustainability is the continued co-existence of entrepreneurialism and professional business management, relevant transformation through technological innovation together with a strategic approach in managing Environmental, Social and Governance (“ESG”) related risks.
Our Digital Transformation
The pandemic and the movement restrictions that followed have reshaped the daily life for many and has accelerated digital adoption and transformed the way we shop, where and how we work and the way we manage our financial-services. Increasingly, consumers expect autonomous and hassle-free processes with a higher degree of personalisation to accommodate their new lifestyles. HLFG consistently upgrade our service delivery with the changing technology environs and diligently implement the priority of our “Digital at the Core” strategy across all operating businesses.
Our commercial banking business, HLB has relentlessly innovated and enhanced their digital banking solutions to provide their customers with a simple and seamless experience driven by their “Built Around You” brand promise. Presently, more than 65% of HLB customers are on our digital banking platforms, and 91% of all banking transactions are performed over the internet and mobile banking apps.
HLA’s digital transformation and product re-positioning plans have improved the performance metrics, showing our efforts in long term value creation. We are investing into digital capabilities to grow customer base for our local and overseas businesses. Both of our overseas companies continue to focus on enhancing their online distribution channels in their digital-led and data-driven general insurance business model. In FY2022, the total number of registered users for our insurance Customer Portal HLA360° increased 21.2% to 373,230.
At HLCB, we have invested and provided more digital solutions to enhance our customers’ investment and trading experiences as well as to improve our cost efficiency and operational productivity. The Stockbroking division operated under HLIB is enhancing its HLeBroking digital platform to provide our clients with a fully digital account opening experience.
Overall, HLFG is committed to invest in its digital capabilities to drive sustainable business growth to all our stakeholders and aspire to deliver best in class customer experience across all our operating businesses.
COMMITMENT TO OUR CUSTOMERS
At HLFG, we remained committed to play our part in assisting our customers and affected communities through these extraordinary times. Our commercial bank, HLB had extended support to the individuals and businesses affected by the flood disaster that occurred in December 2021 with a range of relief assistance programmes on top of facilitating government-initiated programmes.
In support of the Bantuan Keluarga Malaysia (“BKM”) initiative, HLA and HLMT participated in the Perlindungan Tenang Voucher programme, which is a financial assistance scheme by the Government of Malaysia to expand social protection for the lower-income group. Under this scheme, our customers may redeem the RM75 voucher that was allocated to eligible BKM recipients through HLA Stackable Microinsurance plans. The HLA Stackable Microinsurance was introduced to enable the company to reach out to the underserved market with an accessible life protection plan
For our investment banking business, the key focus area is to promote financial inclusion and literacy through continuous engagement with our clients and local communities. We believe that financial literacy is the basis from which sound investment decisions can be made and we assist our clients by providing consultation and support catered to their individual needs. HLCB’s educational resources are offered across several platforms to raise financial awareness and literacy among the community.
COMMITMENT TO OUR PEOPLE
Our employees’ well-being is a priority. We believe that our businesses are best served by having the right talent who are able to be nurtured and developed as their career progresses with us. We strive to foster a high-performance culture and promote shared values that can bind us together with the aim to attract, develop and retain the next generation of leaders to ensure we are fit for the future.
Talent development also involves inculcating a diverse and inclusive workforce. We value a corporate culture where our employees regardless of their age, religion, nationality, gender or background have an equal opportunity to grow and succeed. Employees of the Group are provided with a fair chance to advance their career and be mentored by leaders to help inculcate a positive corporate culture where people are treated fairly, respected and valued.
COMMITMENT TO GOOD GOVERNANCE
HLFG is committed to a high standard of governance, professionalism, ethics and integrity in the conduct of our business and activities. We focus on building a strong culture of compliance and integrity in our business conduct through the adoption of best practices to enhance accountability, transparency and long-term sustainability of our business.
Our corporate culture is grounded in ethical business principles and we have a zero-tolerance position on bribery and corruption. The Board has put in place a corporate governance framework to perform its oversight roles and responsibilities effectively. The Board Audit and Risk Management Committee (“BARMC”) oversee the affairs relating to risk management, compliance and internal controls while the Group Board Information and Technology Committee oversees technology and cyber security related matters.
We have in place group-wide policies and procedures which include the Board Charter, Code of Conduct and Ethics, Anti-Bribery and Corruption Policy (“ABC”), Gifts and Entertainment Policy and Whistleblowing Policy, which are reviewed annually. Policy principles are communicated company-wide and all employees attest to key policies such as Code of Conduct & Ethics and ABC Policy. Monitoring of internal compliance controls was conducted by the Compliance function, and results of such compliance reviews were reported to BARMC for assessment. To enhance our corporate governance culture and awareness, in-house and external training sessions on ABC, financial crime compliance and ESG were organised for directors and employees.
OUR SUSTAINABILITY JOURNEY
At the core of everything we do, we are guided by our principles to make the right decisions that will hold us in good stead today and in the future, improving the well-being of our people, our communities and the environment that we live in. It is imperative that we embrace these sustainable principles and approach them in a strategic manner to realise long-term shareholder value while taking into account the interest of all other stakeholders. The pandemic and events linked to climate change has brought about the increased focus on the importance of sustainable business endeavours.
In 2021, the Malaysian Government of Malaysia has announced the goal of reaching net zero emissions by 2050 in the Twelfth Malaysia Plan and committed that Malaysia would not be building any new coal power plants, strive to expand electric vehicle infrastructure and introduce a blue economic blueprint for coastal development. HLFG is committed to contribute efforts to slow global warming and avert the broader environmental degradation caused by climate change. In FY2022, our Group has taken steps to measure and monitor the Greenhouse Gas (“GHG”) emissions at our key operating companies. At HLFG, we have reduced our combined GHG emission by 21.4% over the past four (4) financial years. On 29 April 2022, HLB had issued its maiden Green Additional Tier 1 Capital Securities amounting to RM900 million in nominal value. The issuance achieved a milestone of being the first issuance of a green AT1 bond by a bank in Malaysia.
Across our Group, we have been updating our internal policies to include ESG considerations and sustainability best practices. At HLFG company, we have updated our procurement policy to embed ESG considerations into our selection of vendors. We have also set out the tax strategy and approach in conducting our tax affairs and tax compliance. For our commercial banking business, HLB has embedded various ESG considerations into their products and services such as investment products onboarding and further enhancement to its Business & Corporate Banking lending ESG assessment framework that includes new sector-specific guidelines. Our asset management companies, HLAM and Hong Leong Islamic Asset Management (“HLISAM”) have introduced an ESG Framework into their Investment Policy, and similarly at HLA, it had implemented an ESG Policy for the investment department to incorporate sustainability factors into their investment decisions. On 20 April 2022, HLAM launched its first ESG fund, the Hong Leong Global ESG Fund.
During the year, our insurance division and investment banking division have set out their respective sustainability framework to guide and accelerate the sustainability agenda with the objective of delivering sustainability-linked value to stakeholders. As we pursue our sustainability agenda, the focus is to grow our Group responsibly and at the same time, contribute positively to our environment, customers, employees and communities. In FY2022, HLFG remained a constituent of the globally recognized FTSE4Good Bursa Malaysia Index. The FTSE4Good Bursa Malaysia Index is designed to measure the performance of companies demonstrating good Environment, Social and Governance practices.
At the time of writing, the numerous global macroeconomic headwinds and geo-political tensions that remain at play do post a threat to the current fragile post-pandemic economic recovery. The surging inflationary pressures, the effects of a strong US dollar on emerging markets and the risk of recession in major economies will likely weigh on the outlook of the global economy.
Looking ahead, we are cognisant that the growth outlook is troubled by uncertainties and the path to full economic recovery may be uneven. While we expect Malaysia’s economy to remain resilient supported by firm domestic demand, improvement in the labour market and robust external trade performance seen in the first half of 2022, Malaysia’s open and trade reliant economy remains susceptible to global external shocks especially if this involves the country’s major trading partners.
Against this backdrop, the Group shall be vigilant in managing our key business risks. The Group’s balance sheet and risk metrics remain resilient, supported by solid asset quality and we have adequate capital and liquidity to support our future business needs. The Group consolidated capital position is comfortably above regulatory limits with a Common Equity Tier 1 ratio of 11.8% and a total capital ratio of 15.9%. Prudent cost management remained a priority with increasing inflationary pressures on our operating cost. We shall judiciously manage our operating cost with targeted investment in talent and digitalisation while maintaining a strong focus on risk management as we enter the new financial year.
Last but not least, I would like to take this opportunity to express my appreciation and gratitude to the Board of Directors, senior management and employees of HLFG Group for their dedication and commitment. The senior management team must also be recognised for successfully navigating the year’s challenges. I would like to express my appreciation to Dato’ Noorazman Bin Abd Aziz, who resigned from the Board on 14 January 2022, for his contribution and support throughout this challenging period and to welcome Ms Emily Kok, who joined the Board on 26 April 2022. Ms Emily Kok comes from a diverse background of venture capital, private equity, management and entrepreneurship.
My sincere appreciation also goes out to our regulators, shareholders, investors, customers and business partners. Thank you for your support and we hope you will continue to support us as we look forward to another year of growth for the Group.
QUEK LENG CHAN
20 September 2022