Management Discussion & Analysis
We are pleased to present the Management Discussion and Analysis ("MD&A") for the financial year ended 30 June 2020 ("FY2020"). In this report, we would like to provide a review of our Group's business operations and financial performance during FY2020.
Despite the impact of COVID-19 in the second half of our financial year, our operating companies' key indicators stayed strong, showing the resiliency of businesses. For FY2020, the Group recorded a net profit attributable to shareholders of RM1.86 billion, supported by commendable results from our commercial banking, insurance, investment banking and asset management businesses. We continue to make progress to strengthen our business franchises with 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 and Islamic 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 decreased by 3.2% year-on-year ("y-o-y") to RM1.86 billion in FY2020. This result was due to a lower total income of RM5.26 billion as compared to RM5.28 billion in the last financial year; mainly attributed to the effects of lower interest rates and a one-off Day 1 modification loss at HLB. The commercial banking business is a major contributor to the financial group results. Against a backdrop of COVID-19 and a subdued economic environment, HLB recorded a 6.1% y-o-y loan growth which was better than industry, with a strong asset quality ratio. Its Gross impaired loan ("GIL") ratio at 0.6% is amongst the best in the industry.
In respect to the Group's Islamic financial services, our efforts continue to show results. Net income from our Islamic banking and Takaful businesses for the period was RM947 million, an increase of 18.3% y-o-y. The contribution of the Islamic businesses to HLFG's profit before tax ("PBT") was 14.9%.
HLFG's book value per share increased 9.8% from RM16.78 as at 30 June 2019 to RM18.43 as at 30 June 2020. Company level borrowings reduced from RM1.45 billion (30 June 2019) to RM1.21 billion as at 30 June 2020. Its double leverage and gearing ratios stood at an adequate level of 1.1 times and 0.1 times as at June 2020, indicating an improving trend of debt level and amount of gearing.
For FY2020, the Group recorded a lower Return on Equity ("ROE") at 9.3%, a decrease from 10.4% in last year due to the impact of COVID-19. Nonetheless, we believe that the long-term shareholders' value of our franchises remains intact. In view of the current economic conditions, we have adopted a more prudent approach in respect of our dividend payment and propose a final dividend of 25 sen. Together with the first interim dividend of 13 sen per share, the total dividend for FY2020 is 38 sen, lower than last year by 4 sen.
While we continue our efforts to improve 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 and the challenging operating environment vis-a-vis the on-going pandemic outbreak. We remain vigilant in prudently managing key business risks and expect the liquidity, capital and credit positions across our operating businesses to serve us well even under stressed scenarios.
Our Group consolidated capital position stayed comfortably above regulatory limits with a Common Equity Tier 1, Tier 1 and Total Capital Ratios at 11.2%, 12.2% and 15.2% respectively as at 30 June 2020.
During the year, RAM Rating Services Berhad ("RAM") assigned AA1/P1 Corporate Credit Ratings to HLFG. Concurrently, RAM also maintained the long-term Financial Institution Ratings of HLB at AAA in recognition of its superior asset quality and reaffirmed HLIB's AAA/P1 Financial Institution Ratings. All the above long-term ratings have a stable outlook. Moody's Investors Services Ltd reaffirmed HLB's baseline credit assessment at A3 on the back of the Bank's strong retail and small and medium enterprise (‘'SME") franchises, conservative risk appetite as well as sound funding and liquidity positions.
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;
- 18% equity interest in the Bank of Chengdu Co., Ltd; and
- 12% equity interest in the Sichuan Jincheng Consumer Finance Limited Company
HLB reported RM2,495 million in net profit, 6.4% lower than last year's result mainly due to the impact of COVID-19 and corresponding interest rates cuts made during the year. However, the performance was mitigated by robust loan growth at 6.1% alongside a strong asset quality position, with a GIL ratio at 0.6%. HLB's Net Interest Margin ("NIM") dropped to 1.88%; lower by 8 bps from last year after a series of Overnight Policy Rate ("OPR") cuts totaling 100 bps made during the financial year. The result also included the impact of a one-off Day 1 net modification loss of RM142 million, which arose from providing payment relief to individual Hire Purchase and Islamic Fixed Personal Financing customers. Excluding the one-offs and the impact of COVID-19, the Bank would have achieved an underlying net profit of RM2,603 million in FY2020.
HLB's total income for FY2020 was RM4,778 million, an increase of 1.1% y-o-y. The result was supported by continuing loan growth and better Non-Interest Income ("NOII"). Contribution from Net Interest Income ("NII") and NOII were also higher than last year as follows:
- NII for FY2020 increased by 0.4% y-o-y to RM3,406 million, against a backdrop of OPR being reduced three times to 2.00% during the financial year. The Bank managed to uphold its NIM at 1.88% for FY2020 on the back of judicious funding actions.
- NOII for FY2020 increased by 2.9% y-o-y to RM1,373 million, with a higher NOII ratio at 28.7%. This is contributed by a strong performance from its Global Markets/Treasury business.
In terms of expense management, HLB's Cost-to-Income ratio improved to 44.0% in FY2020, with positive JAWS attained for the year. The improvement in cost management also reflects the on-going results from the Bank's digitisation efforts and strategic cost initiatives.
Core business performance indicators remained positive, with gross loans growing better than industry at 6.1% y-o-y to RM146 billion as at 30 June 2020 together with continued stringent credit controls. Residential mortgages increased 8.7% y-o-y to RM73 billion, while loans to business & corporate banking grew 9.9% y-o-y to RM3 billion. For the SME segment, the Bank's community banking initiative continued its solid performance with a 32.8% y-o-y loan growth to RM8 billion. The Bank's total assets stood at a record RM221 billion.
Amidst an increasingly competitive environment for deposits, HLB managed to increase customer deposits by 6.4% y-o-y to RM173 billion as at 30 June 2020. The results translated to a Loan-to-Deposit ratio of 83.5% and a Loan-to-Fund ratio of 86.6%, which places HLB in a comfortable liquidity position.
Asset quality and provisioning remained solid, with a GIL ratio of 0.61%. HLB's loan impairment coverage stood at 142%. Inclusive of provisions and security value on GIL, its coverage ratio increased to 184% as at 30 June 2020. HLB's capital position remained robust, with Common Equity Tier 1, Tier 1 and Total Capital Ratios at 13.7%, 14.2% and 16.5% respectively as at 30 June 2020.
In line with the Group's prudent approach for this financial year, HLB has recommended a final dividend of 20.0 sen per share, bringing the total dividend to 36.0 sen per share for FY2020, with a dividend payout ratio of 30%.
Personal Financial Services ("PFS")
PFS remained the largest contributor to HLB, making up 52% and 38% respectively of its revenue and pretax profit. For FY2020, PFS retained its strong momentum, achieving good volume growth across most loan products while gaining market share in its key segments, namely mortgages, unsecured loans, deposits and wealth management. Asset quality remained solid and stable as reflected by a low GIL ratio of 0.47%.
PFS recorded a y-o-y loan growth of 5% which was better than industry, predominantly led by a growth in mortgages and unsecured loans. The mortgage business recorded a loan growth of 7.4% y-o-y against an industry growth of 5.3%, 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 8.7% for the year. Sales acceptance in terms of total approval for residential properties valued between RM250,000 and RM500,000 recorded a significant growth of about 40% y-o-y.
In line with the focus to originate quality loans while deepening our market coverage, we continue to support home ownership programmes, with more than 60% 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.
In a similar vein, the Bank's personal loans/financing base grew 12% y-o-y on the back of stable impairments and a marked increase in sales activity from 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/financing, which has resulted in sales from digital channels increasing during the year, and even more so during the Movement Control Order (MCO) period when customers could not visit the Bank's branches. Loan/financing applications from our online Connect channel were one of the main growth contributors.
In terms of funding, our individual deposit mix remains one of the highest in the industry, which will support the Bank well for continuing growth in the years ahead. Deposits grew 9% y-o-y, capping a strong year for deposit portfolio acquisition and management initiatives.
The Bank's Retail Wealth Management Services continues to be a key contributor to the PFS portfolio as well. Despite a challenging business environment arising from the pandemic and subsequent investment markets uncertainty, our income and total Assets Under Management ("AUM") grew 24% and 18% y-o-y respectively.
Business & Corporate Banking (“BCB”)
BCB continue to deliver consistent and solid results in FY2020, registering revenue and PBT at RM1.2 billion and RM755 million respectively. This represents a 24.5% and 25.2% contribution to the Bank's total income and PBT.
Building on last year's business performance, BCB loans/ financing grew a solid 9.9% y-o-y, outpacing the industry average, spurred by our focus on the commercial segment and strategic SME client segments, which grew a respective 6.8% and 32.8% y-o-y.
Our corporate current account balances are also in healthy shape, registering a robust growth of 24.2% y-o-y, a significant increase compared to last year's performance and better than industry.
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 GM business performed admirably for the year with revenues and pretax profit at RM866 million and RM750 million respectively. This represents a 18.1% and 25.1% contribution to the Bank's total income and pretax profit, respectively, for FY2020.
GM's focus for the year has been on improving the digital offerings especially in forex execution through e-channels. We target to give our retail and corporate customers a seamless remittance experience through enhanced cash management and online remittance solutions. GM is also working with FinTechs to transform our customer's remittance experience, in line with changing customer behaviour and preferences. Moving forwards, GM aims to enhance forex capabilities through online channel which would allow clients to hedge their foreign currency payment requirements.
In FY2020, Hong Leong Islamic Bank Berhad ("HLISB") performed strongly with Profit Before Zakat and Taxation increasing by 8% y-o-y to RM475 million. The increase in earnings was mainly driven by steady asset growth, higher Non-Financing Income and stable operating expenditure.
The growth in earnings was in tandem with the enlarged financing business led by strong business momentum of retail and commercial business segments. Supported by prudent cost management and better operating efficiencies, our operating expenses improved, with a CIR recorded at 27.9%, better than last year's 30.0%.
HLISB had achieved further progress in the digital transformation of its Islamic banking services and products. During the year, HLISB through the partnership with Pusat Pungutan Zakat Majlis Agama Islam Wilayah Persekutuan, successfully on-boarded an e-Zakat service to its digital platform to simplify zakat payments for customers. The initiative has improved the efficiency and digital capability of its products offering. 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 carried on working closely with government agencies such as TERAJU and SME Corporation. During the year, HLISB participated in a new guarantee Scheme with Syarikat Jaminan Pembiayaan Perniagaan and continued its partnership with SME Corporation under the Shariah-compliant SME Financing Scheme (SSFS) Programme to provide financing assistance to eligible SMEs involved in Shariah compliant business activities.
Overseas Banking Operations
HLB's regional business continued to contribute to the overall banking result, supported by good business momentum despite the challenges of the global pandemic. Accounting for 19.1% of the Bank's pretax profit in FY2020, we continue to see robust loan growth from businesses in Cambodia (26.8% y-o-y) and Vietnam (47.4% y-o-y), and strong profit contributions from Bank of Chengdu ("BOCD"), our associate in China. BOCD contributed 21.1% of the Bank's PBT or RM631 million.
For its overseas branches, HLB's Singapore operation is represented by HL Bank Singapore ("HLBS") and a branch in Hong Kong ("HLBHK"). In recent years, HLBS has changed from a pure Private Banking outfit to a more holistic financial services provider with greater coverage in niche sectors. HLBHK continues to pursue a SME led strategy besides being a treasury center for the Bank.
INSURANCE/TAKAFUL FINANCIAL & OPERATIONAL REVIEW
HLFG's 100%-owned subsidiary, HLA Holdings Sdn Bhd ("HLAH") is the insurance holding company of the Group.
- 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 FY2020, HLAH recorded a net profit of RM228 million, lower by 17.4% y-o-y. The result in HLAH was mainly attributed by lower HLA's profits due to the impact from COVID-19 which had resulted in lower interest rates, a challenging economic environment, volatile equity markets and new regulations. However, the results were mitigated by better contribution from other entities. Our full year share of MSIG's net profit increased by 56.6% y-o-y to RM89 million in FY2020 while the Takaful business also delivered an encouraging result in terms of profit growth. Without one-off items and COVID-19, HLAH's normalised PBT would be approximately 10% better than last year.
HLA, as a life insurer, is the largest operating business within our insurance division, comprising 64.9% of HLAH's total insurance pretax profits. HLA's net profit decreased 36.1% to RM141 million in FY2020, mainly due to lower interest rates affecting actuarial reserving, equity investment portfolio volatility and new regulatory obligations such as the Minimum Allocation Rate.
In respect to business, the growth momentum of gross premiums and new business regular premiums ("NBRP") remained steady despite COVID-19. Gross premiums increased 1.1% to RM2.8 billion while NBRP grew 3.6% to RM565 million. The results 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.
We continue to make good progress in growing our Non-Participating and Investment-Linked new business premiums at over 90% of new business premiums. This is important to our efforts to create higher NBEV for our life business. In FY2020, HLA's Embedded Value ("EV") improved by 3.0% but NBEV was lower 26.2% y-o-y. The lower NBEV was mainly due to assumption changes to reflect the lower interest rate environment. Our digital transformation, distribution and product plans are in place to improve NBEV and deliver long term value creation. In line with our digital transformation plan, we are accelerating the use of technology to transform our business and better serve our customers and stakeholders.
After establishing ourselves within the Ordinary Life segment and having built up a sizeable distribution capability, HLA has continued to focus 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, our market ranking improved to the No. 3 position for the first half of 2020.
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. The total premiums from Banca channel grew 17% y-o-y while Banca NBRP increased 15% y-o-y, contributed to a 10-year CAGR of 26%. Over the last 10 years, HLA has increased its Non-Agency (Bancassurance) market share of NBRP from 4.9% in 2010 to 9% in the first half of 2020.
HLA maintained its position as 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 6.0% in FY2020, amongst the lowest in the industry, reflecting its continuing efforts in strategic cost management whilst reinvesting into its digital transformation plans.
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 2019. 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 2019 by International Finance Awards 2019.
HLMT is the Takaful operating company in our Group. During the financial year, HLMT's operator's fund recorded a topline growth of 3.5% y-o-y with a revenue contribution of RM77.7 million. Correspondingly, its profit before zakat and tax increased 62.3% y-o-y to RM16.9 million. The result also reflects improved cost efficiencies from past and continuing investments in its operational and business capabilities. HLMT remains focused on improving its performance through its agency and bancassurance channelswhilst embedding and executing value based intermediation initiatives in its plans.
Overseas General Insurance
We have two overseas general insurance companies in HLAH, 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 were down by 30% y-o-y and 28% y-o-y respectively for HLIA and HLAS during the year, as their online business was mainly driven by travel insurance which has been seriously impacted by the lockdown in most countries starting from February 2020 as a result of the COVID-19 pandemic. For the period prior to the pandemic outbreak (July 2019 to January 2020), HLIA's online channel business premiums were $31.24 million with a growth rate of 14% y-o-y.
In FY2020, HLAS recorded a loss before tax of RM11.5 million due to the impact of COVID-19, on top of high commercial lines reserving costs which are expected to reverse out subsequently upon normalization with actual claims experience. HLAS started underwriting commercial lines business during the last few years which carries a high initial reserving in its books.
During the year, our overseas general insurance businesses continued to add service value with the launch of online tools such as mobile app, eClaims and various digital enhancements. These new digital services cater to customer needs with enhanced operational efficiency for better customer experience. Despite current challenging conditions, the business will continue to invest in technology, new segments and new products in line with long-term strategic priorities for sustainable and improved profitability when the external environment improves.
INVESTMENT BANKING FINANCIAL & OPERATIONAL REVIEW
Hong Leong Capital Berhad is an investment holding company of the investment banking, stockbroking and asset management business group under HLFG. HLCB's key operating subsidiaries are 100%-owned Hong Leong Investment Bank Berhad ("HLIB"), 100%-owned Hong Leong Asset Management Berhad ("HLAM") and a newly established 100%-owned Hong Leong Islamic Asset Management Berhad ("HLISAM") which commenced operations in January 2020. 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 and HLISAM provide asset management services.
Despite a challenging year, HLCB has been less affected given positive results from its stockbroking division in this period and a steady asset management business. HLCB achieved a strong PBT growth of 24.8% y-o-y at RM95.8 million, while its net profit increased 39.1% y-o-y to RM94 million in FY2020. Without the impact of COVID-19 delaying mandate deals, HLCB's normalised PBT would be approximately 48% better than last year.
As part of our commitment to provide a reasonable return to our shareholders, HLCB has recommended a final dividend of 23.0 sen per share for FY2020 which is 4.5% higher than the dividend payout for the previous financial year. The total capital ratio of our key operating subsidiary, HLIB, remained healthy at 46.1% as at 30 June 2020.
Investment Banking (“IB”)
The Investment Banking business achieved a revenue of RM68 million and a pretax profit of RM20 million in FY2020. Treasury and Markets ("T&M") was the largest contributor to the IB Division, contributing 58% of total IB Division revenue, ahead of Equity Markets and Debt Markets, which contributed 8% and 30% of divisional revenue respectively. For FY2020, T&M ended the year recording a slower revenue growth of 5.6% y-o-y due to volatility in bond prices from rising concern over emerging markets and the local political landscape.
The Equity Markets and Debt Markets divisions continue to operate under very challenging conditions, as there were deferment and significant reduction in capital raising activities in the Malaysian market, affected adversely by the outbreak of COVID-19 and slower economic environment throughout the financial year. However, our Debt Markets division registered an encouraging topline growth of 72.6% y-o-y, which was largely attributable to continued focus on delivery and execution of their mandates with reduced impact from the pandemic given the customers mandates on hand.
The Stockbroking business of HLIB achieved a revenue of RM102 million and a pretax profit of RM45 million in FY2020. Brokerage income accounted for 74.8% of total revenue earned by the Stockbroking business in FY2020, while the net brokerage income gained is 45.9% higher than the previous financial year. The growth in revenue was in line with the higher traded volume in the market, which was a 15.9% y-o-y increase to RM639.8 billion recorded by Bursa Malaysia. Our share of the market at 4.4% was higher than the previous financial year of 3.9%, mainly attributed to higher retail participation during the second half of the financial year
HLAM recorded a net profit increase of 26.8% y-o-y to RM21 million. Our Asset Management business remained profitable on the back of a 13.4% y-o-y increase in revenue, due to growth in our average assets under management and higher management fee margins for FY2020. The average AUM grew by 4.6% to RM18.3 billion in FY2020, contributed by the growth in money market funds, fixed income funds, equity and balanced funds. Fixed income funds and money market funds, in particular, remained as investors' favorites amidst volatile market conditions. During the year, HLAM acquired a wholly owned fund management company and converted its license for an Islamic asset management business.
HLAM received 11 Lipper fund performance awards during the year categorized under five (5) funds, namely Hong Leong Dividend Fund, Hong Leong Asia-Pacific Dividend Fund, Hong Leong Value Fund, Hong Leong Growth Fund and Hong Leong Dana Makmur Fund (Malaysia Islamic and Global Islamic).
The Group is exposed to credit, market, operational, liquidity, cyber security, legal and compliance, environmental and social 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 Sustainability, Corporate Governance, Risk Management and Internal Control of this annual report.
Looking ahead in the immediate term, we remain cautious on the Malaysian economy, amidst a challenging business environment and increased external uncertainties with the current pandemic on-going. In the longer 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.
For further information on our subsidiaries, please refer to:
- HLB's FY2020 MD&A in their FY2020 annual report at www.hlb.com.my or www.bursamalaysia.com; and
- HLAH and HLA's financial statements at www.hla.com.my; and
- HLCB's FY2020 MD&A in their FY2020 annual report at www.hlcap.com.my or www.bursamalaysia.com.
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.