[ ] 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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[ ] 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 country’s 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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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.

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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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2010 2011 20120

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

160,000,000

77,730,20887,650,089

140,284,562

5,815,0636,567,126

10,098,511

TOTAL ASSET AND EQUITY

TOTAL ASSET TOTAL EQUITY

Year's

RM '000

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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, it’s 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

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.

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DATA/YEARTOTAL ASSET

TOTAL EQUITY

NET INCOME

INTEREST INCOME

INTEREST EXPENSES

2010 77,730,208 5,815,063 767,817 2,592,586 1,209,792

2011 87,650,089 6,567,126 807,493 2,952,529 1,501,193

2012 140,284,562 10,098,511 1,247,280 5,493,832 2,942,252

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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 bank’s

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.

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RESULT AND ANALYSIS

This section focuses more to present, analyse and discuss the result about Hong Leong Bank

performance for three years.

RESULT

Table 3.0: Summary of Hong Leong Bank external performance

Based on table 3.0, it’s 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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RATIOS/

YEAR

RETURN ON

ASSETS (ROA)

RETURN ON

EQUITY (ROE)

NET INTERERT

MARGIN

2010

¿ 767,81777730208

¿0.99 %

¿ 767,8175815063

¿13.20 %

¿ 2592586−120979277730208

¿1.78 %

2011

¿ 80749387650089

¿0.92 %

¿ 8074936567126

¿12.30 %

¿ 2952529−150119387650089

¿1.66

2012

¿ 1247280140284562

¿0.89 %

¿ 124728010098511

¿12.35 %

¿ 5493832−2942252140284562

¿1.82 %

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ANALYSIS

A. RETURN ON ASSET (ROA)

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 chairman’s 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 Chairman’s 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 don’t know because

the chairman’s 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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2010 2011 20120.820.840.860.88

0.90.920.940.960.98

1

0.99

0.92

0.89

RETURN ON ASSETS (ROA)

RETURN ON ASSETS (ROA)

Year's

Return On Assets %

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Last year the percentage of decreasing was 0.07%, but this year the percentage is only

0.03%, this show what chairman’s 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 didn’t have enough time to make an adjustment between

net income and total assets.

In chairman’s 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)

2010 2011 201211.8

1212.212.412.612.8

1313.213.4 13.20

12.30 12.35

RETURN ON EQUITY (ROE)

RETURN ON EQUITY (ROE)

Year's

Return On Equity (%)

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

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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 chairman’s 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 it’s about 0.9% drop. In chairman’s 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 chairman’s 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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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 chairman’s is the best move

on future-proofing the sustainability of the bank. Besides that, chairman’s 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

2010 2011 20121.55

1.60

1.65

1.70

1.75

1.80

1.85

1.78

1.66

1.82

NET INTERERT MARGIN

NET INTERERT MARGIN

Year's

Net Interest 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 it’s 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.

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YearINTEREST INCOME

“00”

CHANGE IN

INTEREST INCOME

INTEREST EXPENSES

“000”

CHANGE IN

INTEREST EXPENSES

NET INTERERT MARGIN

CHANGE IN NET

INTERERT MARGIN

2010 2,592,586 -13.28% 1,209,792 -30.59% 1.78% -0.08%

2011 2,952,529 12.19% 1,501,193 19.41% 1.66% -0.07%

2012 5,493,832 46.26% 2,942,252 48.98% 1.82% 0.09%

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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Hong Leong Bank and EON Bank also can categories as a factor of rising in net interest

margin.

FINDINGBased 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 chairman’s 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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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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[ ] 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), 1-

16. 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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[ ] 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-leong-

eon-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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