BANK MANAGEMENT
BFN 2044
ASSIGNMENT
Hong Leong Bank
LECTURER: Mr. Nazri
1.0 Hong Leong Bank Berhad Common-Size Income Statement
2005 2006
Interest income 100.0 100.0
Interest expense -49.8 -54.6
Net interest income 50.2 45.4
Income from Islamic Banking Operations 1.7 7.1
51.9 52.5
Non-interest income 41.0 56.4
92.9 108.9
Overhead expenses -32.2 -27.4
Profit before provision 60.7 81.5
Loan and financing loss and provision -21.4 -7.9
Profit before taxation and zakat 39.3 73.6
Taxation and zakat -11.1 -20.4
Profit after taxation and zakat 28.2 53.2
1.1 Hong Leong Bank Berhad Common-Size Income Statement Analysis
Net interest income for Hong Leong Bank has decreased from 50.2 to 45.4 due to the increasing interest expense. The interest expense for the bank increased in 2006 because, the amount of deposits and placement of banks and other financial institutions in Hong Leong increases. The income from Islamic Banking Operations for the bank increased tremendously from 1.7 in 2005 to 7.1 in 2006, as the Islamic banking franchise for the bank grew strongly. Finally, the profit after taxation and zakat for the bank increased extremely from 28.2 in 2005 to 53.2 in 2006, seeing that the bank did cut down on overhead expenses and, loan and financing loss.
2.0 Hong Leong Bank Berhad Common-Size Balance Sheet
2005 2006
Assets
Cash and short-term funds 27.7 19.3
Securities purchased under resale agreements 0.0 17.2
Deposits and placements with banks and other financial institutions 6.4 6.1
Dealing securities 6.4 4.6
Investment securities 11.2 5.8
Loans, advances and financing 42.3 44.3
Other assets 3.2 0.4
Statutory deposits with Bank Negara Malaysia 1.0 1.5
Tax recoverable 0.0 0.0
Investment in subsidiary companies 1.1 0.1
Fixed assets 0.5 0.4
Deferred tax assets 0.3 0.2
Total assets 100.0 100.0
Liabilities
Deposits from customers 71.0 69.3
Deposits and placement of banks and other financial institutions 4.5 3.6
Obligations on securities sold under repurchase agreements 9.8 16.5
Floating rate certificates of deposit 0.0 0.7
Bill and acceptances payable 3.4 1.0
Other liabilities 0.9 1.2
Provision for taxation 0.0 0.0
Total liabilities 89.6 92.4
Share capital 4.3 2.7
Reserves 6.1 5.4
Less: Treasury shares, at cost 0.0 0.5
Shareholders’ funds 10.4 7.6
Total liabilities and shareholders’ funds 100.0 100.0
2.1 Hong Leong Bank Berhad Common-Size Balance Sheet Analysis
In 2006, the banks had purchased back a number of securities and resell them under the obligations on securities sold under repurchase agreements thus, causes the obligations on securities sold under repurchase agreements, and the securities purchased under resale agreements for the bank increased in a tremendous rate from 9.8 to 16.5, and 0.0 to 17.2 correspondingly. Besides that, the investment securities and other assets for the bank also decreased greatly from 11.2 to 5.8 and 3.2 to 0.4 respectively. The reason that causes the bank’s other assets to decrease, is because of the amounts recoverable from Danaharta. As at 30 June 2006, the amount recoverable from Danaharta has been fully provided. The bank’s bills and acceptances payable has furthermore decreased from 3.4 to 1.0 because of the decreased in deposits and placements of banks and other financial institutions, obligations on securities held under bills and acceptances payable. The shareholders’ funds for Hong Leong as well decreased since the bank had purchased back its own shares up to 10% of existing total issued and paid-up share capital.
3.0 Hong Leong Bank Berhad Comparative Statements
2005
RM 2006
RM Change
RM Change
%
Interest income 1,309,683 2,080,936 771,253 58.9
Interest expense -652,590 -1,137,121 -484,531 74.2
Net interest income 657,093 943,815 286,722 43.6
Income from Islamic Banking Operations
21,838
147,334
125,496
574.7
678,931 1,091,149 412,218 60.7
Non-interest income 536,876 1,174,427 637,551 118.8
1,215,807 2,265,576 1,049,769 86.3
Overhead expenses -421,408 -570,085 -148,677 35.3
Profit before provision 794,399 1,695,491 901,092 113.4
Loan and financing loss and provision
-280,050
-165,434
114,616
-40.9
Profit before taxation and zakat 514,349 1,530,057 1,015,708 197.5
Taxation and zakat -145,034 -424,262 -279,228 192.5
Profit after taxation and zakat 369,315 1,105,795 736,480 199.4
3.1 Hong Leong Bank Berhad Comparative Statements Analysis
The interest expense for the bank changed by 74.2% because, the amount of deposits and placement of banks and other financial institutions in Hong Leong increases. The income from Islamic Banking Operations for the bank increased by 574.7%, as the Islamic banking franchise for the bank grew strongly. Finally, the profit after taxation and zakat for the bank increased extremely to 199.4% in 2006, seeing that the bank did cut down on overhead expenses with only slight increase of 35.3% and, loan and financing loss with (40.9%).
4.0 Hong Leong Bank Berhad Ratios
2005 2006
Profitability Ratios
Return on Assets (%) 1.79 1.64
Return on Equity (%) 17.11 21.45
Earnings & Efficiency Ratios
Earnings Spread 0.01 0.01
Efficiency Ratio 0.35 0.27
Asset Utilization 0.03 0.04
Burden Ratio 0.00 -0.01
Liquidity Ratios
Current Ratio 1.06 1.07
Loans to Deposits 0.56 0.61
Deposits Times Capital 7.24 9.56
Financing Ratios
Total Debt Ratio 0.90 0.92
Total Debt to Equity Ratio 8.58 12.11
Equity to Assets 0.10 0.08
Loss Allowance to Loans 0.02 0.01
Operating Ratios
Net Interest Margin 0.02 0.02
Net Non Interest Margin - -
Cost to Income Ratio 0.35 0.27
Operating Profit Margin 0.18 0.18
4.1 Hong Leong Bank Berhad Ratios Analysis
The bank return on assets decreased from 1.79% to 1.64%, which signifies that the management is poor in conducting profitable operations. As for the return on equity, it has shown a positive enhancement as it rises from 17.11% to 21.45% in 2006. The management's performance in producing a rate of return on the equity capital employed is proficient.
While for the earnings spread, it has been stable along the years and it indicates that, Hong Leong is constant in managing their earnings assets and liabilities. The efficiency ratio for the bank decreased from 0.35 to 0.27 in 2006. The ratios show that, the bank is laying the underpinning for continual growth and competitiveness through its productivity. Hong Leong bank’s asset utilization slightly changed from 0.03 to 0.04. These ratios point out that, the bank doesn’t make any expansion in organizing the earning assets to produce income, but, the bank is competent in managing its manufacturing overhead costs incidental to operations. The burden ratio in 2005 is 0.00 decreased to -0.01 in 2006.
In favor for the bank’s current ratio is computed as, 1.06 in 2005 and 1.07 in 2006. The bank should achieve a higher current ratio in order to accomplish a high liquidity by either increasing the assets or decreasing the liabilities. As for the bank’s loans to deposits ratio, has a small increment from 0.56 to 0.61. From the ratios, the bank is quite capable in managing its loans through its deposits; the bank should achieve higher loans to deposits ratio to capitalize on its liquidity. The deposits times capital ratio for Hong Leong is 7.24 in 2005 and 9.56 in 2006. This indicates that, the mixture of profit potential and risk measures for the bank varies in years but the bank is laying the foundation for constant increase and competitiveness.
On behalf of the total debt ratio, the bank has maintained quite high ratios all through the years; 0.90 in 2005 increase to 0.92 in 2006. The bank’s ratios point to the increasing of the bank’s liabilities, in order to reduce its total debt ratio, the bank should increase its total assets or reduce its total liabilities. The bank’s total debt to equity ratio has increased in tremendously from 8.58 to 12.11 in 2006. With a high total debt to equity ratio, the bank is restricted in the amount of money they can borrow and less favorable to existing or potential creditors, while may be favorable to the stockholders. Hong Leong is administrating the stockholder investment in fixed assets very well by decreasing the equity to assets ratio from 0.10 in 2005 to 0.08 in 2006. The loss allowance to loans ratio for the bank decreased from 0.02 to 0.01 the following year. These ratios signify that, the bank estimation allowance for loan losses has decreased and the bank should maintain a certain level of loss allowance to loans for the inherent risks in the loan portfolio.
Hong Leong’s net interest margin is 0.02 in 2005 and 2006. The ratios illustrate that, the bank has a very low net interest income earned from its average earning assets. The value of cost to income ratio for the bank is 0.35 in 2005 decreased to 0.27 in 2006; this shows that, Hong Leong is excellent in managing its operating profit including non-interest income. The bank’s operating profit margin is constant calculated as 0.18 in 2005 and 2006. The operating profit margin ratios imply that the bank is managing its operating expenses very well by maintaining a constant ratio.
5.0 Strength
The rating on Hong Leong Bank Bhd. reflects its adequate balance sheet strength and satisfactory asset quality. That said, profitability continues to be challenged by industry wide decline in interest margins, as well as the bank’s efforts to boost no interest income by developing its no conventional banking business. Hong Leong Bank was established in 1968 and listed on the Kuala Lumpur Stock Exchange since 1994. The enlarged entity is the fifth-largest Malaysian bank today with 180 branches in Malaysia and one each in Singapore and Hong Kong. Being one of the oldest and one of the largest banks in the country, the bank has become the choice and the trusted for its experience and establishment stability and this is proven by the many awards won by the bank over the years.
5.1 Opportunities:
Hong Leong has increased their profit 17% to 21% this shows they have internal strength to grow it further. It has internal capabilities to grow further.
One of he resent trend towards the banking industry is adopting mobile banking or mobile commerce where transactions could be done using the mobile phone. This could be the convenient cousin on internet banking. It needs to adopt its surver such as way that mobile phone users are able to do transaction. This will further develop banking service to rural areas.
It is not to be forgotten that most about 60% to 80 % of the economic active population is in the developing country. Since Malaysia is in this bank of countries, Hong Leong has lot to explore from this market. It has great opportunity and market for its services in the future in Malaysia. When thinking of the survival factor and economic negative waves this could be a really helpful factor.
When we looking at the Arabian or Middle East courtiers it is know that they have access oil dollar money. They have not developed the idea of investing and reinvesting due the barrier of religious believes. Most of them don’t believe in today’s conventional banking system and they tend to keep their money away from the bank. But the concept of Islamic banking had given them high hope and way to invest. Malaysia is believed to be the hub for Islamic banking and financial system since we have a stable economic system that had been running for years. Middle Eastern do bring lots of dollar money to Malaysia. Since Hong Leong does have the Islamic baking adopted and it is believed that non-Muslims are also joining this system of finance. Therefore we could conclude that Hong Leong has great opportunity forward with Islamic banking.
Microfinance is another area they could exploit, where concern with issuing loans to lower income class or the villagers is. Most of the commercial banks have totally forgotten this sector of the market.
5.2 Threats and Weakness:
Over all Hong Leong bank could be said that it is going strong. But it is the aim of every business to grow, expand, acquire or merge with firms with the same level. It needs to grow constantly so that it can capture more market share and be a better part of the industry. It is doing same level with other competitors. They adopt every strategic advantage its competitor takes either as the second mover or as the first mover which is the plan of the bank.
There is a trend which practices the big eating the small, where the large companies are talking over the small firms. In case of Hong Leong, it has direct threat from local competitors as well as the International competitors. The biggest challenge would be not to get in the hand of predator.
Conclusion:
There are unique opportunities for sustainable, profitable growth and to innovate, differentiate and deliver its Vision. Hong Leong management Agenda outlines the journey towards that Vision. It sets out the following aspirations and pace for the Group over the longer term as we seek:
• To strengthen and embed our core position in Malaysia towards a strong domestic presence
• To establish regional and international presence, and Centers of Excellence in Islamic Banking, Private Banking and Investment Banking, and
• To establish a strong regional business to participate in markets outside our domestic core.
What it wants to be in the future is clearly stated in its vision and mission statement. Over all, the bank had generated fare enough relationship with its customers and the name “Hong Leong ” is deep in its customer’s heart. It is the biggest strength it has.
But we try not to forget the value of the management, who takes the all stress and make perfect decisions which leads to profit for the bank. Since manpower is not valued in most of the cases.
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