HL 2017

ANNUAL REPORT 2017



Vision

Highly digital & innovative ASEAN financial services company

Contents FINANCIALS

CORPORATE 98 Directors’ Report
108 Statements of Financial Position
02 Hong Leong Bank Story 109 Statements of Income
04 The Business 110 Statements of Comprehensive
06 Awards & Accolades
08 Corporate Milestones Income
10 Chairman’s Statement 111 Statements of Changes in Equity
16 Five Year Group Financial Highlights 115 Statements of Cash Flows
18 Group Managing Director/Chief 118 Notes to the Financial Statements
264 Statement by Directors
Executive Officer’s Review 264 Statutory Declaration
26 Management Discussion & Analysis 265 Independent Auditors’ Report
52 Sustainability Statement 270 Basel II Pillar 3 Disclosures
60 Corporate Information
62 Notice of Annual General Meeting ADDITIONAL INFORMATION
65 Statement Accompanying Notice of
319 Other Information
Annual General Meeting 330 Branch Network
66 Board of Directors
70 Key Senior Management • Form of Proxy
75 Board Audit Committee Report
78 Board Risk Management Committee

Report
81 Corporate Governance, Risk

Management & Internal Control

HONG LEONG BANK BERHAD CORPORATE
ANNUAL REPORT 2017
Hong Leong Bank Story

2

CORPORATE

Hong Leong Bank Story

Hong Leong Bank Berhad is a regional financial services
company based in Malaysia, with presence in Singapore, Hong
Kong, Vietnam, Cambodia and China. The Bank is technology-
focused and emphasises the development of financial
capabilities to serve its clients across the five geographies.

Hong Leong Bank Berhad (“HLB” or and bounds, organically as well as On the regional front, HLB became HONG LEONG BANK BERHAD
“the Bank”) is listed on Bursa Malaysia through mergers and acquisitions. Its the first Malaysian bank in 2008 to ANNUAL REPORT 2017
Berhad and forms part of the Hong merger with EON Bank Group in 2011 enter the Chinese banking sector with
Leong Group. Headquartered in placed Hong Leong Bank as Malaysia’s a 20% strategic shareholding in Bank
Kuala Lumpur, the Bank has a strong fifth largest banking group; with over of Chengdu Co., Ltd. In December of
Malaysian entrepreneurship heritage. RM190 billion in assets as at 30 June the same year, HLB became the first
HLB was originally incorporated as 2017. Malaysian and Southeast Asian bank
Kwong Lee Mortgage and Remittance The Bank reaches out to its customers to be granted a license to incorporate
Company in 1905 in Kuching, Sarawak within the communities in which it and operate a 100% wholly-owned
and later as Kwong Lee Bank Limited operates through various channels. commercial bank in Vietnam. In 2013,
in 1934, bearing heritage of the oldest This includes a distribution network Hong Leong Bank launched its 100%
local financial institution in Malaysia. of 285 branches locally; sales wholly-owned commercial bank in
Kwong Lee Bank Berhad was acquired and business centres in Malaysia, Cambodia and in November, set up a
by the MUI Group in May 1982 and Singapore, Hong Kong, Vietnam and representative office in Nanjing.
renamed Malayan United Bank Berhad Cambodia as well as a comprehensive Building on strong entrepreneurial
on 2 February 1983. In 1989, it was range of complementary and electronic roots and its firm foundation of values,
renamed as MUI Bank. Under the channels which include self-service HLB is committed to embedding itself
MUI Bank banner, it grew from 11 to terminals, the Hong Leong Call Centre, in the communities within which it
35 branches nationwide. On 3 January Hong Leong Online Banking and Hong operates to meet the needs of its
1994, Hong Leong Group acquired MUI Leong Mobile Banking. customers. Under the umbrella of
Bank Berhad through Hong Leong Credit The Bank has stepped up its efforts the Hong Leong Financial Group, the
Berhad (now known as Hong Leong on digitisation through continuous Group’s ability to harness cutting-
Financial Group Berhad) and renamed optimisation and integration of edge technologies to provide a
it Hong Leong Bank Berhad. The Bank electronic and digital facilities and comprehensive suite of conventional
was listed on the Kuala Lumpur Stock processes to both meet the needs of and Islamic financial products and
Exchange (now under Main Market of the Gen-Y community, and to enhance services under one roof truly makes it
Bursa Malaysia) on 17 October 1994 the overall customer banking journey. a leading integrated financial services
and since then has grown by leaps organisation in Malaysia and Asia.

3

HONG LEONG BANK BERHAD CORPORATE
ANNUAL REPORT 2017
The Business

Hong Leong Bank Berhad provides a comprehensive suite of
personal financial services, business and corporate banking,
trade finance, treasury, branch and transaction banking, wealth
management, investment banking as well as Islamic financial
services.

Hong Leong Bank Berhad (“HLB” or “the Bank”) has one of the most extensive branch
networks in the country with 285 branches throughout Malaysia, with one branch each
in Singapore and Hong Kong, three branches and one transaction office in Vietnam,
five branches in Cambodia and a representative office in Nanjing. This is coupled with
over 1350 self-service terminals and a full-fledged call centre.
At HLB, we constantly look for ways to invest in technology and processes that increase
value to our customers and change the way we interact with the communities in
which we serve. This is mainly achieved through our innovations in the digital arena,
in addition to conventional means which is in line with the aim of striking a balance
between conventional brick and mortar footprints whilst ramping up efforts to be at
the forefront in an increasingly digital, tech and mobile savvy community.
Via these various channels offered, the Bank is firmly embedded in the communities in
which it serves and is committed to understanding its customers’ needs, as well as to
deliver products and services that will enable them to fulfil their financial aspirations.

4

CORPORATE

The Business

HONG LEONG BANK’S KEY BUSINESS PILLARS ARE:

Personal Financial Business and Global Markets Islamic Financial
Services Corporate Banking Global Market’s principal Services
Principal business Principal business activities include A wholly-owned
activities cover the activities include the assisting customers subsidiary of the
provision of retail provision of business on their investment Bank, Hong Leong
loans, deposit products, banking solutions and hedging needs Islamic Bank focuses
wealth management, including working through various treasury on Shariah-compliant
and priority banking capital and term loans, products, ranging from commercial banking,
services to individuals. deposit and liability foreign exchange, Islamic wholesale and
management products, money market, investment banking,
cash management and derivatives including transactional banking
trade finance services interest rate swaps services, as well
as well as debt capital and interest rate swap as Islamic wealth
market solutions options, to structured management.
to businesses and investment products.
companies.

REGIONAL FOOTPRINT priority banking services to individuals. to make a strategic investment into HONG LEONG BANK BERHAD
In line with its growth strategy, HLB Whereas business banking solutions China. Bank of Chengdu is a leading city ANNUAL REPORT 2017
has been expanding its footprint in the include working capital and term loans, commercial bank in Western and Central
Asian region. deposit and liability management China based in Chengdu, the capital of 5
Singapore Operations products and trade finance services as Sichuan Province. With a network of
HL Bank, Singapore is a full banking well as foreign exchange (“forex”) and over 170 branches and outlets, it carries
license branch offering wealth money market services. To date HLBVN out a full-fledged commercial banking
management, treasury services, deposit has a branch and transaction office business. In March 2010, the joint
products and auto loan services. In located in Ho Chi Minh City, and a branch venture company between HLB and the
2014, HL Bank, Singapore embarked on each in Bin Duong and Hanoi. Bank of Chengdu, obtained regulatory
a transformational journey towards an Cambodia Operations approval to establish a consumer finance
integrated business model, expanding In July 2013, Hong Leong Bank (Cambodia) business in Chengdu. In November
into health banking and consumer PLC (“HLBCAM”) commenced operations 2013, Hong Leong Bank had set up a
banking propositions. as a 100% wholly owned subsidiary representative office in Nanjing which
Hong Kong Operations providing comprehensive financial commenced operations in February the
The Bank’s branch in Hong Kong offers services covering consumer banking, following year.
Treasury and Wealth Management business banking, global markets and
products and services. It is also the first transaction banking services. With
bank in Hong Kong to launch an Islamic five full-fledged branches primarily
banking window. located in Phnom Penh, HLBCAM’s
Vietnam Operations primary customer focus is towards
Hong Leong Bank Vietnam Limited established SME and Commercial
(“HLBVN”), a subsidiary of the Bank, corporate customers, high net worth
commenced operations in October 2009. individuals, affluent and emerging
HLBVN is a full-fledged commercial bank affluent as well as tech savvy young
in Vietnam whose principal activities professionals.
include provision of retail loans, deposit Investment in China
products, wealth management, and Via its 20% shareholding in Bank of
Chengdu Co., Ltd (“Bank of Chengdu”),
HLB is also the first Malaysian bank

HONG LEONG BANK BERHAD CORPORATE
ANNUAL REPORT 2017
Awards & Accolades

Asiamoney Fixed Income Poll 2016
(Asiamoney)
Category:
- Interest Rates Research #1
(Malaysia & Local Currency)
- Overall Best For Interest Rates #1
- Interest Rates Product & Sales #1
- Interest Rates Derivatives #1

Asiamoney FX Poll 2016
(Asiamoney)
Category:
- Best Domestic FX Providers #2
- Best of FX Products and Services #2
- Best of FX Options #2
- Best of FX Research & Market
Coverage #2

6

Awards & Accolades CORPORATE

Financial Insights Innovation
Awards 2017 (IDC Financial
Insights)
Category: Asia/Pacific’s Leader in
Cashless Collaboration
Malaysian e-Payment Excellence
Award 2017 (MyClear)
Category: Best FPX Bank
Malaysian e-Payment Excellence
Award 2017 (MyClear)
Category: Best Instant Transfer Bank
Malaysian e-Payment Excellence
Award 2017 (MyClear)
Category: Outstanding Contribution
to MyDebit

Awards for Excellence 2017: Asia
Results (EuroMoney)
Category: Malaysia’s Best Bank 2017

HONG LEONG BANK BERHAD
ANNUAL REPORT 2017

7

CORPORATE

Corporate Milestones

Renamed as MUI Bank,
operating in 35 branches

1989

Incorporated as Acquired MUI Bank through
Kwong Lee Bank Limited Hong Leong Credit Berhad
(Now known as Hong Leong
1934 Financial Group Berhad)

1994

Started in Kuching, Sarawak, Entered China Banking Sector
Malaysia, under the name with a 20% strategic stake in
of Kwong Lee Mortgage and
Remittance Company Bank of Chengdu Co., Ltd.

1905 2008

HONG LEONG BANK BERHAD Hong Leong Bank Vietnam
ANNUAL REPORT 2017 opened its doors in
Ho Chi Minh City

2009
8

Corporate Milestones CORPORATE

Intensified digitisation of Hong Leong • Piloted in-branch mobile
Bank’s products and services servicing solution featuring

• Hong Leong Bank Cambodia • Launched new Internet iPad-equipped service
commenced its operations Banking platform, PEx ambassadors to greet and
• Set up of representative
office in Nanjing, China payment, tablet app and service customers
cardless withdrawal • Launched HLB LaunchPad to
2013 nurture Malaysian technology
2014
and FinTech start-ups
• Introduced eFD via FPX

2017

Launched Mach by • Launched new platform for • First domestic bank to
Hong Leong Bank, a next business internet banking to enable FPX payment allowing
generation Banking sub-brand replace HLOB (Hong Leong
Online Business), Applewatch customers to conduct
2012 transactions 24/7 via Hong
app, e-FD & e-TDI, e-Will/
Hong Leong Bank completed Wasiat and Biometric Leong Connect BIZ
merger with EON Bank Group authentication • Launched Artificial Intelligence
Chat Service using IBM Watson,
2011 • Introduced physical PEx+
Merchant Payment E-TT and online statement
• Supercharged innovation
2015 through the setting up of a
Customer Experience and
HONG LEONG BANK BERHAD
Innovation Lab ANNUAL REPORT 2017
• Moved to online platforms for
auto and personal loans, credit 9
card & CASA (Current Account

& Savings Account) opening
applications

• PEx+ Merchant Payment
went online

2016

HONG LEONG BANK BERHADCORPORATE
ANNUAL REPORT 2017
Chairman’s Statement

tVAoaClEuonemhFamonirctmAinlgel nt

Dear Shareholders and Stakeholders,
I am delighted to share with you a commendable
set of results for the financial year ended 30
June 2017 (“FY2017”) given the domestic and
external headwinds affecting the Malaysian
economy.
10

CORPORATE

Chairman’s Statement

RMMIL4L,I5O5N1 RMMIL2L,I7O4N8 RBMIL1L9IO5N.6
revenue record PBT of total assets

Our prudent and responsible strategies Given our sound financial performance this year, the
towards growth continue to deliver Hong Leong Bank Group will continue to focus on the
strong, consistent and high-quality execution of our plans and key strategic priorities to
results with new milestones achieved. drive sustainable long-term growth.
Both the Bank’s revenue and profit
before tax (“PBT”) hit new highs of Given our sound financial performance the Malaysian economy continued on HONG LEONG BANK BERHAD
RM4,551 million and RM2,748 million this year, the Hong Leong Bank Group track with its growth recovery. ANNUAL REPORT 2017
respectively. These positive results were will continue to focus on the execution The strong fundamentals of the
made possible by sustained margin and of our plans and key strategic priorities Malaysian economy have shielded
efficiency improvements as well as a to drive sustainable long-term growth, the nation from the excesses of
recovery from our associate Bank of augmented by our commitment to the external and domestic head winds.
Chengdu’s contribution. Group’s core principles in the pursuit of The nation’s diversified sources of
The sound top-line performance during business value creation. growth have helped contain the
FY2017 bodes well for the Group as the It gives me great pleasure to present spillover effects of sector-specific
Malaysian economy starts to record to you the Annual Report and Financial shocks. Stronger domestic demand
higher growth in 2017 from better Statements of the Group for the financial through private sector spending in
domestic demand and higher exports year ended 30 June 2017. the first half of 2017 contributed to
benefitting from improvements in global growth, as sustained wage growth
growth and financing conditions. The ECONOMIC ENVIRONMENT and steady labour market conditions
nation’s economy expanded by 5.7% in During the financial year under review, supported consumer spending. On
the first half of 2017 aided by pro-growth the global economic landscape saw the supply side, higher growth in the
policies taken by the government and regulators continue to adjust their manufacturing and services sectors
an increase in private sector spending. policies to a mixed series of economic contributed to faster economic growth
The projected improvement in global data, the indeterminate outcome in 1H17.
economic activity in 2017, together of Brexit and the increase in global Given these positive domestic
with a recovery in commodity prices geopolitical risks. The laudable pre- developments and better signs of an
and continued supportive domestic emptive measure taken by Bank improving global economy, the Group
demand are positive signs for the Negara Malaysia (“BNM”) to adjust the is confident that growth prospects for
nation’s economy. This is expected to degree of monetary accommodation by the nation’s economy remain buoyant,
translate into a higher real GDP growth reducing the OPR by 25 basis points to translating into favourable prospects
between 4.3 – 4.8% in 2017 for the 3.00% on 13th July 2016 ensured that for the Group going forward.
Malaysian economy compared to 4.2%
real GDP growth achieved in 2016.
However there remain uncertainties
and geopolitical tensions affecting the
global environment and we stay vigilant
of such factors.

11

CORPORATE

Chairman’s Statement

WE DELIVERED RM195.6 billion as at 30 June 2017. For FY2017 the Board had proposed a
Total gross loans and financing grew final dividend of 30.0 sen per share
The banking sector is increasingly 3.8% year-on-year (“y-o-y”) to RM125.1 payable on 15 November 2017, subject to
much more challenging with higher billion compared to RM120.6 billion the approval of shareholders during the
capital adequacy requirements, as at 30 June 2016. This achievement forthcoming Annual General Meeting
increased compliance standards amidst was predominantly led by growth in on 23 October 2017. This represents
a backdrop of continued technological key segments of domestic retail, SMEs an increase of 4.0 sen per share from
changes affecting the way we operate. and our international operations. Total the year before and brings the total
Notwithstanding these inherent customer deposits expanded 4.5% y-o-y dividends for the financial year ended
challenges, the Group’s underlying to RM155.2 billion. 30 June 2017 to 45.0 sen per share which
translated into a payout ratio of 43%
operating metrics remains solid driven
by a combination of prudent loan pricing The Bank is pleased to announce and dividend yield of 2.9%.
HONG LEONG BANK BERHAD and funding cost management, coupled earnings per share (“EPS”) of 104.9 sen,
ANNUAL REPORT 2017 with healthy non-interest income whilst return on equity (“ROE”) stood at
contribution as well as maintaining 9.8% for FY2017. Our share price closed ISLAMIC BANKING
strong discipline around operating at RM15.66 for FY2017 representing a
efficiencies. 30.3 % appreciation over five years, out- Islamic finance continues to be a key
performing both the FBM KLCI index and element in the growth of the Malaysian
Total assets saw growth of 3.0% from FBM KLFin index by 20.0% and 12.6% financial sector. In 2016, the Islamic
12 RM189.8 billion as at 30 June 2016 to respectively. banking industry achieved a growth of

Chairman’s Statement CORPORATE HONG LEONG BANK BERHAD
ANNUAL REPORT 2017
8.3% in total assets to account for 28% 13
of the overall banking system.
Moving forward, Hong Leong Islamic
Bank Berhad (“HLISB”) will continue
to focus its efforts on enhancing our
digital capabilities, uphold high Shariah
standards and encourage diversified and
innovative product offerings to drive
growth. In line with BNM’s objectives,
HLISB is also devoted in promoting
value-based intermediation which aims
to generate a positive and sustainable
impact to the economy, community and
environment, without compromising
the financial returns to its shareholders.
HLISB has consistently recorded stable
growth since its inception in 2005. For
FY2017, HLISB recorded a Profit After
Tax and Zakat of RM223 million, while
gross Islamic financing grew by 11.5% to
RM20.8 billion. HLISB contributed 16.6%
of the Group’s total financing assets.
PROGRESS ACROSS THE REGION
Our regional presence and businesses
remains an integral part of the Group’s
expansion strategy and we remain
committed towards ensuring that we
deliver long-term growth and returns
to our shareholders in a sustainable
manner. As such, prominence was given
to the right fit of customers and business
propositions with growth potential that
could deliver substantial value to the
Group’s business. During the year under
review, total profit contribution from
international operations accounted for
14.6% of the Group’s pre-tax profit.
Our Singapore operation, through HL
Bank Singapore (“HLBS”) represents an
important regional hub for the Group.
The branch has transformed from a
pure private banking proposition to
other niche segments in health banking
and auto financing with a significant
market share in the last 3 years. For the
financial year ended 30 June 2017, HLBS
achieved a 15.0% y-o-y loan growth to
RM5.4 billion. In the coming year, HLBS

CORPORATE

Chairman’s Statement

monitors corporate governance best
practices to adapt and improve when
necessary.

Our approach to sustainability also
comes through in our commitment to
ensure our policies, practices, products
and programs collectively align to our
purpose. We have done this in part
by creating simple, safe, transparent
and easy-to-use financial solutions
that give people greater control of
their finances. Another way we think
about sustainability is the work we do
to strengthen our local economies, by
working with and investing in them.

HONG LEONG BANK BERHAD will continue to build on the strength COMMITTED TO SUSTAINABLE Finally, to be a sustainable company,
ANNUAL REPORT 2017 of the Hong Leong franchise to service PERFORMANCE we must value our people and give all
other niche segments in the Singapore Building a sustainable Group is about employees the support they need to
consumer and business community. how, at the core of everything we do, build their careers and achieve their
Hong Leong Bank (Cambodia) PLC’s total we are guided by our principles to make goals. We have a diverse and inclusive
assets grew by 35.1% y-o-y to RM1.2 the right decisions that will hold us in workplace that reflects the diversity of
billion whilst its deposits increased to good stead today and in the future. We the communities in which we serve.
RM852 million, showing a 89.9% y-o-y think about this in a variety of ways. Through our recruitment programs
growth. Loans stood at RM808 million First, it is important to maintain focus and partnerships, we are investing
with a 53.7% y-o-y growth, recording a on operational excellence and on the in the future by bringing the best and
milestone of turning profitable within momentum we have built in managing brightest to work at Hong Leong. As
three years. operating expenses. We have made we think about all the ways we pursue
It was particularly encouraging to continued progress towards improving sustainability, our focus is to use our
observe a recovery in the profit the efficiencies of our Group operating size and scale in ways that contribute
contribution from the Bank of Chengdu expenses whilst investing in new positively to our communities, create
(“BOCD”) despite China’s moderating business initiatives and technologies. opportunities for our customers and
economy and challenging operating Sustainability also includes having the employees and to grow our company
environment in 2016. For the period right governance. We have a diverse responsibly.
under review, BOCD contributed 12.5% and experienced Board of Directors
of the Group’s PBT or RM342.9 million, that provides independent oversight. LOOKING AHEAD
which is a 9.8% y-o-y improvement Our Board constantly looks for ways to Improvements in the global macro
from prior year. ensure its diversity and strength and environment will continue as economic
activities improves in 2017 underpinned
by an expansion in domestic demand
in the advanced and emerging market
economies, supported in part by
benign monetary and fiscal policies.
These pro-growth policies will serve to
stimulate global demand and accelerate
international trade. Nevertheless, we
will continue to remain vigilant of
business conditions and exercise caution
in executing our strategy of prudent and
responsible growth.

14

CORPORATE

Chairman’s Statement

Our approach to sustainability also comes through in our
commitment to ensure our policies, practices, products
and programs collectively align to our purpose.

Our nation’s inherent strengths arising ACKNOWLEDGEMENTS dedication, professionalism and passion
from the diverse economic structure, Before I conclude, I would like to take in the carrying out of their duties to help
resilience in our external positions this opportunity to record my heartfelt us achieve our objectives. I would also
and policy flexibility will be pivotal thanks to my fellow Board members for like to offer my sincere thanks to BNM,
to withstand any global economic their support and guidance. My deep the Ministry of Finance, government
challenges. I am confident that financial gratitude also goes to our customers, agencies and other regulatory authorities
intermediation and policy by BNM will business partners and shareholders for for their invaluable assistance, continual
continue to support growth. their loyal support, collaboration and guidance and most valued support.
Going forward, the Group is committed continued confidence in the Group. To
to its key strategy of pursuing long- our employees and the management QUEK LENG CHAN
term sustainable growth across all team at the Bank and the Group level, Chairman
our businesses. We are cognisant of I would like to express my appreciation 18 September 2017
the business and economic hurdles for their unselfish commitment,
that lie ahead. We will continue to
focus on improving our operational Going forward, the Group is committed to the
efficiency with innovation and increase sustainable growth and excellent performance of both
our capacity through strategic cost our domestic and regional businesses.
and portfolio management. We will
also strengthen our digital offerings
to enhance customer satisfaction and
expand our customer base.

HONG LEONG BANK BERHAD
ANNUAL REPORT 2017

15

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Five Year Group Financial Highlights

GROUP FY13 FY14 FY15 FY16 FY17
RM’Million RM’Million RM’Million RM’Million RM’Million
Total Assets
Gross Loans 163,586 170,351 184,020 189,828 195,553
Customer Deposits 97,209 104,169 113,418 120,605 125,147
Shareholders’ Fund 123,637 130,252 140,276 148,524 155,233
Profit Before Tax 13,037 14,530 16,790 22,685
Profit After Tax 2,393 21,117
Earnings per share (sen) 2,613 2,746 2,382 2,748
Net dividend per share (sen) 1,856 2,102 2,233 1,903 2,145
Dividend payout ratio (%) 106
119 126 100 105
*33.8 41.0 41.0 41.0 45.0
32.0% 34.4% 32.4% 44.1% 42.9%

Note: * Franked Dividend System. Net dividend per share figure represented dividend receivable by shareholders after 25% tax

BANK FY13 FY14 FY15 FY16 FY17
RM’Million RM’Million RM’Million RM’Million RM’Million
Total Assets
Gross Loans 145,500 148,822 160,681 162,238 164,817
Customer Deposits 83,308 89,225 96,691 101,054 103,516
Shareholders’ Fund 109,169 114,099 122,337 126,241 129,859
Profit Before Tax 11,340 12,330 13,428 18,442
Profit After Tax 2,058 2,279 17,431
1,974 2,025 2,347
1,450 1,591 1,776 1,605 1,744

Gross Loans, Advance YoY +3.8% Deposits From Customers YoY +4.5%
and Financing
Outpaced industry growth with strong
Growth momentum led by retail and SME retail franchise
(RM’Million)

Individuals Deposits Mix %
Total Deposits (RM’ Mil)

HONG LEONG BANK BERHAD 123,637 130,252 140,276 148,524 155,233
ANNUAL REPORT 2017
53.5% 51.2% 50.1% 54.8% 55.5%
97,209
104,169

113,418
120,605
125,147

16 ‘13 ‘14 ‘15 ‘16 ‘17 ‘13 ‘14 ‘15 ‘16 ‘17

CORPORATE

Five Year Group Financial Highlights

Total Income YoY +8.9% Profitability

Solid underlying revenue Record PBT achieved
(RM’Million) (RM’Million)

PBT
PAT

ROE % 15.3% 14.3% 10.0% 9.8%
15.0%
4,007
4,039
4,067

4,178
4,551

2,393
1,856

2,613
2,102

2,746
2,233

2,382
1,903

2,748
2,145

‘13 ‘14 ‘15 ‘16 ‘17 ‘13 ‘14 ‘15 ‘16 ‘17

Asset Quality Note*:
PAT excluding one-off tax impact of RM102 million would be RM2,247 million.
Continued to outperform industry ROE excluding one-off tax impact of RM102 million would be 10.3%; Lower ROE from
enlarged equity base post rights issue in December 2015
GIL Ratio
Industry GIL Ratio Capital Ratios

Robust capital positions, supportive of growth

Total Capital %
Tier 1 %
CET 1 %

1.95% 1.76% 1.61% 1.63% 1.63% 14.8% 14.6% 14.3% 14.7% 15.8%
1.40% 1.18% 0.84% 0.79% 0.96% 11.9% 11.9% 11.9% 13.1% 13.7%
12.7%
10.2% 10.5% 10.8% 13.3%

HONG LEONG BANK BERHAD
ANNUAL REPORT 2017

‘13 ‘14 ‘15 ‘16 ‘17 ‘13 ‘14 ‘15 ‘16 ‘17 17

HONG LEONG BANK BERHADCORPORATE
ANNUAL REPORT 2017
Group Managing Director/
Chief Executive Officer’s Review

“The Group’s performance is also a reflection
of our core values of building a resilient and
a sustainable business model and providing
an impetus to our resolve to continue on
our path of excellence and create long-term
value for our stakeholders.”
Dear Shareholders,
Customers and Business Partners,
It’s been an encouraging 2017 for the Bank in
which we delivered an admirable set of financial
results despite the unfavourable economic
environment and rising global uncertainties
18 which had also impacted the banking landscape.

CORPORATE

Group Managing Director/
Chief Executive Officer’s Review

The Bank’s operating profit saw an the global macro-economic environment you the Annual Report and Financial
impressive 21.6% increase to RM2,543 and sustained demand from regional Statements of Hong Leong Bank Berhad
million compared to RM2,091 million economies that are expected to continue for the financial year ended 30 June 2017.
in the previous year – a new milestone to spur demand for Malaysian goods and
achieved. Our unwavering efforts to services. On top of a more favourable OPERATING PERFORMANCE
deliver sustained margin and efficiency external environment, dynamic financial The Bank’s total income for FY2017 stood
improvements as well as modest markets and a stable banking system at a record RM4,551 million, a 8.9%
recovery from associates contributed to domestically also augured well with year-on-year (“y-o-y”) increase driven
the Group’s improved performance. The the growth prospects of the Malaysian by disciplined loan pricing, prudent
Group’s performance is also a reflection economy resulting in stable domestic funding cost management and a healthy
of our core values of building a resilient demand, most notably sustained private non-interest income contribution. Net
and a sustainable business model and consumption and increased investment interest income continued to improve
providing an impetus to our resolve activities. All in all, we believe this during the fourth quarter (“Q4FY2017”),
to continue on our path of excellence augurs well for the Malaysian financial underpinned by an 11.6% y-o-y growth
and create long-term value for our sector and will help drive the Group’s to RM864 million which led to a strong
stakeholders. performance in the year ahead. Looking 9.1% y-o-y expansion to RM3,355 million
The global economy is anticipated forward, while we continue to be for the full year. For the financial year,
to improve in 2017 due to more confident of the Malaysian economy we net interest margin (“NIM”) increased
synchronized growth in the advanced will remain mindful of the challenges to 2.09% compared to 1.94% in the
and emerging market economies which that lie ahead. previous year, which marked a healthy
is translating into better global trade. I am pleased with the continued progress 15 bps improvement from the previous
Malaysia, being an open economy, is also and strides the Group have made during year.
benefitting from the improvements in the year and it is my pleasure to present

HONG LEONG BANK BERHAD
ANNUAL REPORT 2017

19

CORPORATE

Group Managing Director/
Chief Executive Officer’s Review

For fiscal 2017, non-interest income Operating expenses remained well managed with
increased 8.4% to RM1,196 million led positive JAWS ratio (income growth rate exceeding
by higher wealth management fees, expenses growth rate) reaffirmed for both the quarter
dividend income from investments and and full year following strategic cost management as
higher gains from treasury operations. well as higher efficiencies attained.
Correspondingly, non-interest income
ratio was 26.3% as efforts to diversify
the Bank’s income intensify.

Operating expenses remained well
managed with positive JAWS ratio and 12.7% y-o-y to RM2,543 million and y-o-y growth in residential mortgages to
HONG LEONG BANK BERHAD (income growth rate exceeding RM2,145 million, respectively. RM56.9 billion and a healthy mortgage
ANNUAL REPORT 2017 expenses growth rate) reaffirmed for loan pipe-line. Given weaker vehicle
both the quarter and full year following In FY2017, gross loans and financing sales which had been affected by more
strategic cost management as well as advanced 3.8% y-o-y to RM125.1 billion cautious consumer sentiment, our
higher efficiencies attained. Cost-to- led by lending to the domestic retail transport vehicle loan balances were
income ratio (“CIR”) for FY2017 was lower and SME segments as well as our also lower at RM17.6 billion. However,
at 44.1% compared to the corresponding international operations. Domestic loans we are encouraged to see vehicle sales
20 period last year. Consequently, operating to the retail segment increased 5.2% picking up pace again driven by new
and net profit for FY2017 expanded 21.6% y-o-y positively influenced by a 10.4% model launches as we aim to regain

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Group Managing Director/
Chief Executive Officer’s Review

some of the growth momentum for this a combination of prudent underwriting, RNMet 2pro,f1it 4of 5
portfolio. credit risk management and proactive MILLION
The Group’s funding and liquidity recovery management. The Group’s loan
position remains robust with loans-to- impairment coverage ratio was 96%, Liquidity
deposit ratio of 80.6% and a liquidity higher than the industry average and if coverage
coverage ratio of 137%. Customer inclusive of the regulatory reserve the
deposits for FY2017 increased by 4.5% Group’s coverage ratio would have been 137%ratio of
y-o-y to RM155.2 billion whilst CASA higher at 151% as at 30 June 2017. Our
grew 4.2% y-o-y to RM38.8 billion to capital position also remains strong with
give rise to a CASA mix of 25%. That a solid Common Equity Tier 1, Tier 1 and
said, the Bank continues to maintain a Total Capital Ratios of 13.3%, 13.7% and
stable funding base with an enviable 15.8%, respectively.
industry leading individual deposit mix International operations accounted for
of 55.5% leveraging on its strong retail 14.6% of the Group’s pre-tax profit in
franchise. FY2017, led by two consecutive quarters
Our asset quality remained solid in of improved contributions from the Bank
FY2017 with a gross impaired loan ratio of Chengdu (“BOCD”). Profit contribution
of 0.96% - still one of the lowest in the from BOCD improved by 9.8% y-o-y to
industry and this was achieved through RM343 million in FY2017, contributing
12.5% of the Group’s pre-tax profit.

HONG LEONG BANK BERHAD
ANNUAL REPORT 2017

21

HONG LEONG BANK BERHADCORPORATE
ANNUAL REPORT 2017
Group Managing Director/
Chief Executive Officer’s Review

HUMAN RESOURCE
We acknowledge that our people are a
valuable asset and a key differentiator
to our continued success. As we are
committed to our goal of positioning the
Group as an innovative ASEAN financial
services provider that maximises on
its digital capabilities, we continue to
fortify our investment into our people’s
development to retain, develop and
attract a pool of diverse talents.
On-going leadership and technical
competency programmes are given
emphasis to equip our human capital
with capabilities that ensure functional
product knowledge and satisfactory
service delivery.
As sustainability is our underlying goal
we continue to provide our employees
with learning opportunities for
professional and personal development.
Creativity and innovation is encouraged
to improve the quality of our deliverables
and we are committed to provide
support and motivation necessary to
face the challenges of the dynamic
operating environment. We recognise
their potential and leadership capability
as catalytic to their contribution towards
our continued growth and success. Our
people are accorded the same respect
and professionalism that they are in
turn expected to share with every single
Hong Leong Bank customer.

SUSTAINABILITY
FY2017 was an important milestone in the
evolution of our Sustainability journey,
with the inaugural development of our
Sustainability Report, which defines our
economic, social and governance goals
for the years ahead. Each and every
person at the Bank has a role to play in
realising our ambitions in sustainability,
and we are working together with our
network of clients, partners and other
stakeholders to collectively achieve
the commitments we have made. By
continually focusing our efforts on the
opportunities that align most closely

22 with our core strengths as a bank, we

CORPORATE

Group Managing Director/
Chief Executive Officer’s Review

will be able to have the greatest and
most sustainable impact.
Sustainability matters to the future
success of our business. But it’s not
good enough to think, wish and hope.
We have set out an ambitious plan, and
aspire to act with both integrity and
persistence to deliver against it. Strong
progress has been made in the financial
year under review across our businesses
and geographical markets. We are
proud of the growing suite of innovative
products, services and partnerships
that the Bank has developed to deliver
both societal and commercial value in
tandem. We hope you will enjoy reading
about our progress to date and our
ambitions for the coming years.

Awards: Recognition of our digital Strong progress has been made in the financial
efforts year under review across our businesses and
Our continued investments in our geographical markets.
multi-platform banking channels and
other financial enablers are bringing HONG LEONG BANK BERHAD
simplicity, convenience and ingenuity ANNUAL REPORT 2017
to you wherever you are, with some
of these initiatives getting noticed.
In the year under review, the Bank
has received numerous awards and
accolades which recognizes the Bank
for its resilient performance against
a challenging operating environment
and of our ongoing transformation
and commitment towards innovation
and provision of digital solutions in
the Financial Services sector. From
Euromoney’s excellence award for
Malaysia’s Best Bank 2017 to IDC
FINANCIAL INSIGHTS and MyClear awards
recognising the bank’s commitment
to providing our customers and
stakeholders with innovative solutions to
address all their financial requirements.

23

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Group Managing Director/
Chief Executive Officer’s Review

STRATEGIC PRIORITIES
Our strategic priorities and long-terms values remain the same, as they are the guiding principles that have led us to where
we are today, one of the leading banks in Malaysia. We will continue to uphold and adhere to these 3 tenets going forward:-

HONG LEONG BANK BERHAD 1. CUSTOMER ENGAGEMENT for effective cross selling and Our in-house technical capabilities,
ANNUAL REPORT 2017 AND EXPERIENCE acquisitions. In the long term, we coupled with front-end digital tools
TRANSFORMATION aim to give customers simplicity, and improved speed to market,
speed and control through a digital facilitates our collaboration with
In 2016, we launched a bank- journey that is completely on-line, business partners - through shared
wide strategic initiative of paperless and hassle-free with real- banking services capabilities, to
embracing a mindset of time approvals by leveraging on Big build a competitive edge for future
being digital at the core Data Analytics. competition. At the same time, we
which is also an overarching We will continue to transform have initiated a mentorship and
business model. These values our engagement process with developmental programme named
will be fully integrated with customers and re-imagine banking HLB LaunchPad aimed at nurturing
our strategic plan and core through our customer journeys young Malaysian entrepreneurs
competencies which we expect and experiences to streamline and fostering collaboration with
each employee to embrace. We interaction over multiple channels the emerging generation of FinTech
continue to explore new ideas and provide seamless as well as practitioners and other tech-savvy
to interact and engage with personalised customer experience start-ups.
our customers and improve across various touch-points.
overall customer experience 2. PRODUCTS AND SERVICES Through digitisation of our products
through the use of innovative TRANSFORMATION and services we strive to achieve
and cutting-edge technologies. We are cognisant of the evolving operational excellence, transform
We have introduced several digital trends that shape consumer the cost of acquisition and servicing
first-in-Malaysia innovative behaviour and business models customers, allowing us to direct
initiatives (powered by IBM that serve to transform the financial savings from existing cost base into
Watson’s cognitive computing services industry. We utilise these investment in digital initiatives.
technology) that employ latest digital technologies and Whilst digitisation is our principal
Artificial Intelligence (“AI”) to emerging business models to priority, we remain cognisant of
support customer service, a transform our products and services the cyber-security risks involved.
robotic concierge at branches to to cater to the discerning needs of As such, we have invested in cyber-
help guide customers and the our customers. security capabilities to ensure
launch of Loan2Go - a straight- Towards this we have strengthened a secure and protected digital
through-processing mobile auto our technology readiness and environment. The Group’s robust
loan application platform. invested in in-house proprietary and automated processes coupled
digital capabilities as well as with comprehensive security
Leveraging on a combination reconfigured our systems to optimise controls serves to ensure real-time
of structured and unstructured our technology infrastructure. service delivery whilst managing
data we are able to yield We realise the importance of future threats.
meaningful insights that agile development cycles to face
help to deliver products and the increasing competition from 3. PHYSICAL LOCATION AND
services that enhance customer innovative non-financial service DISTRIBUTION NETWORK
experience. Similarly, service players such as FinTech. TRANSFORMATION
quality is constantly monitored
through real-time analytics In line with evolving customer
as well as to generate leads preferences and our initiatives to

24

CORPORATE

Group Managing Director/
Chief Executive Officer’s Review

transfer banking transactions to OUTLOOK ACKNOWLEDGEMENTS
an on-line platform, we believe
mobile and Internet banking will The global economy is expected I take this opportunity to record my HONG LEONG BANK BERHAD
account for more than 70% of total to remain on a moderate growth utmost appreciation to our valued ANNUAL REPORT 2017
transactions of the Bank over the path in 2018 underpinned by customers and shareholders for their
next five years. Therefore, we are accommodative monetary and fiscal unwavering support and the Board of 25
actively re-platforming our branches policy from major economies. Policy Directors for their wisdom and guidance.
to ensure relevancy and efficiency as normalisation in the US is expected My deepest gratitude for the assistance
we continue to embed branches into to be gradual thereby reducing the and co-operation extended to us by
the communities that they serve. impact on the world economy and Bank Negara Malaysia and the Ministry
We are confident that robust digital global financial markets. Meanwhile, of Finance, related government agencies
capabilities will help us to accelerate we do not expect any policy moves and other regulatory authorities
branch transformation by moving from the European Central Bank who contributed meaningfully to our
away from low-value transactions and the Bank of England in the administration.
to more complex products sales immediate future. Finally but no less in importance, I
that require human assistance. Our Going into 2018, the Malaysian applaud the dedication and commitment
branches will complement their economy is expected to improve of my management team and all
service offerings on our digital in tandem with a more conducive Hong Leong Bank employees for their
platforms. Towards this, we are global business landscape. Sustained continued support and confidence in the
equipping branches with digital domestic demand underpinned Group. As a team, we have endured and
devices to enhance customer service by continual expansion in private now we can celebrate the result of our
experience. With our in-branch consumption and investment tireless effort.
sales and service tablet devices spending will be the principal growth For more in-depth information
the branch relationship officers catalyst while improving exports will regarding the Bank’s performance, the
will be able to assist and offer our provide the additional boost. Management Discussion and Analysis
customers personalised after-sales Given the favourable outlook, the (“MD&A”) section that follows provides
and customer service, help them to Management will continue to be a deeper insight.
perform digital banking transaction vigilant with the risks that we take,
and at the same time offer new exercise prudence in our expenditure DOMENIC FUDA
products that meet their needs. whilst continuing with strategic Group Managing Director/
There are also dedicated SME initiatives that would add long-term Chief Executive Officer
coverage teams stationed at shareholders’ value. At the same 18 September 2017
branches and business centres with time, we persist on our quest for
specially trained senior executives opportunities to capitalise on and
to drive engagement with and serve grow.
the needs of SMEs. In line with our
strategy to grow our presence in
the SME segment and increase our
market share, our officers embed
their services in the community to
improve engagement and service
delivery.

HONG LEONG BANK BERHAD CORPORATE
ANNUAL REPORT 2017
Management Discussion & Analysis

FINANCIAL REVIEW

26

CORPORATE

Management Discussion & Analysis

1. FINANCIAL HIGHLIGHTS
SUMMARY OF GROUP PERFORMANCE

Profitability Total Income FY2016 FY2017 Growth %
& Efficiency Operating Profit 4,178 4,551 8.9
(RM’million) Profit Before Tax 2,091 2,543 21.6
Profit After Tax 2,382 2,748 15.4
Balance Sheet Earnings Per Share (sen) 1,903 2,145 12.7
(RM’million) Net Interest Margin (%) 100 105 5.1
Asset Quality Cost-to-Income Ratio (%) 1.94% 0.15
Liquidity and Return on Assets (%) 49.9% 2.09% (5.8)
Capital Return on Equity (%) 1.02% 44.1%
10.0% 1.11% 0.09
Total Assets 9.8% (0.2)
Gross Loans, Advances and Financing 189,828
Customer Deposits 120,605 195,553 3.0
148,524 125,147 3.8
Gross Impaired Loan Ratio 155,233 4.5
Loan Impairment Coverage Ratio 0.79%
Loan Impairment Coverage Ratio (including 120% 0.96% 0.17
Regulatory Reserve) 181% 96% (24)
151% (30)
Loan-to-Deposit Ratio 81.2%
Common Equity Tier 1 Capital Ratio 12.7% 80.6% (0.6)
Tier 1 Capital Ratio 13.1% 13.3% 0.6
Total Capital Ratio 14.7% 13.7% 0.6
15.8% 1.1

Total Income Cost-to-income Ratio Operating Profit
• Highest level attained in past 5 • Positive JAWS persisted, on • Highest operating profit achieved

years, on prudent funding cost improved efficiencies y-o-y since merger; grew 22% y-o-y
management & robust non-interest
income contribution

RM’mil 9% 49.9% 44.1% RM’mil 22%

4,178 4,551 2,091 2,543

FY2016 FY2017 FY2016 FY2017 FY2016 FY2017 HONG LEONG BANK BERHAD
ANNUAL REPORT 2017

27

CORPORATE

Management Discussion & Analysis

Gross Impaired Loan Ratio Gross Loans Deposits
• Asset quality remains strong; with • Growth led by retail and SME • Healthy deposit growth leveraging

no major stress segments on strong retail franchise

0.79% 0.96% RM’bil 4% RM’bil 5%

120.6 125.1 148.5 155.2

FY2016 FY2017 FY2016 FY2017 FY2016 FY2017

Solid operating metrics & profitabilityHONG LEONG BANK BERHAD
Almost all of our key indicators have shown considerable improvements from the prior year despite the less than favourableANNUAL REPORT 2017
business environment that has affected the banking industry.
Total income for FY2017 rose 8.9% y-o-y to a record RM4,551 million driven by astute loan pricing and prudent funding cost
management, coupled with healthy non-interest income contribution.
Positive JAWS was attained as income grew 9% y-o-y outpacing expense growth at 5% y-o-y (on BAU expenses which excludes the
one-off Mutual Separation Scheme costs of RM172 million incurred in FY2016), attained as a result of strategic cost management
which continues to gain traction whilst some of it being reinvested into other capabilities that we believe would help us to
improve efficiencies in the long-run. Consequently, cost-to-income ratio (“CIR”) for FY2017 was lower at 44.1% compared to the
corresponding period last year.
Operating profit for FY2017 expanded by 21.6% y-o-y to RM2,543 million compared to the RM2,091 million the year before on the
back of solid top-line growth coupled with improved efficiencies. Correspondingly, PBT climbed 15.4% y-o-y to a record RM2,748
million, whilst EPS stood at 105 sen.
Balance sheet
Gross Loans & Financing increased 3.8% y-o-y to RM125.1 billion, led primarily by the Bank’s domestic retail and SME segment as
well as higher contribution from international operations. Comparatively, customer deposits increased by 4.5% y-o-y to RM155.2
billion supported by the Bank’s strong retail deposit franchise. As a result, the Bank’s loans-to-deposits (“LDR”) ratio was a
prudent 80.6% and supportive of growth going forward.
Asset Quality metrics ahead of industry
The Bank’s asset quality remained broadly stable with a gross impaired loan (“GIL”) ratio of 0.96% while loan impairment
coverage ratio stood at 96% with both indicators ahead of the industry average (more details to be disclosed in the asset quality
section). If inclusive of the regulatory reserve set aside, the Bank’s coverage ratio increases to 151% as at 30 June 2017.
Robust Capital Position
The Bank’s capital position remains robust. The Common Equity Tier 1 at 13.3%, Tier 1 at 13.7% and Total Capital Ratio at 15.8% is
amongst the strongest in the industry.

28

CORPORATE

Management Discussion & Analysis

2. KEY PERFORMANCE INDICATORS (KPIS)
FY2017 KPI Achievement
All in all, the Bank had performed admirably in FY2017 given the solid underlying operating performance. Notably, there were

areas that we could have performed better on but Management is cautiously optimistic that with our strategic priorities in place,
the Bank is on track for further improvement in the new financial year.

Target FY2017 Achieved FY2017
Industry Loan Growth
Gross Loan Growth 3.8% y-o-y X
LD Ratio (4-5%)
~82% 80.6% √
Net Interest Margin >2.0% 2.09% √
Non-Interest > 25% 26.3% √
Income Ratio <46%
10% - 11% 44.1% √
Cost-to-income Ratio
Return on Equity 9.8% (reported) √
10.3%* (underlying)
Note*: Excluding one-off impact of RM102mil

• Our key segments of mortgages and SME led loans growth. HONG LEONG BANK BERHAD
• The LD ratio of 80.6% was within guidance and in line with our view that maintaining ample liquidity remains a top ANNUAL REPORT 2017

priority, especially in a dynamic operating environment influenced by macro global uncertainties.
• NIM had improved by 15 bps y-o-y to 2.09% on the back of prudent funding costs management and effective loan

pricing.
• Non-interest income (“NII”) expanded 8.4% y-o-y, driven mainly by stronger wealth management fees, dividend income

from investments and higher gains from treasury operations. This led to NII ratio of 26.3% and within guidance.
• CIR was well-managed and showed an improvement to 44.1% in FY2017 as we continue to deliver on efficiency

improvements and productivity gains.
• Underlying Return on Equity (“ROE”) came in at 10.3% (versus a reported ROE of 9.8%, after exclusion of one-off impact

for prior years under provision of tax from a subsidiary company absorbed by the Bank amounting to RM102 million).

29

CORPORATE

Management Discussion & Analysis

FY2018 Targets
• For FY2018, the Group is guiding for a loan growth of 5-6% and an ROE of 10-11%. The Bank intends to continue
maintaining a strong liquidity position and keep to a LD Ratio of approximately 82%. We target NIM and NII ratios to be
above 2.1% and approximately 26%, respectively.
• Management expects to derive further efficiency gains going forward as well as maintain and preserve our strong asset
quality. With that, cost-to-income ratio is expected to trail below 44% whilst gross impaired loan ratio is to sustain below 1%.

FY2017 Actual Target FY2018

Gross Loan Growth 3.8% y-o-y 5-6%

LD Ratio 80.6% ~82%

Net Interest Margin 2.09% >2.1%

Non- Interest 26% ~26%
Income Ratio

Cost-to-income Ratio 44.1% <44%
<1%
Gross Impaired Loan 0.96% 10-11%
Ratio
The Bank’s top-line improved 8.9%
Return on Equity 9.8% (reported)
10.3%* (underlying) y-o-y to RM4,551 million.
Note*: Excluding one-off impact of RM102 mil
We achieved a record profit
HONG LEONG BANK BERHAD 3. INCOME STATEMENT ANALYSIS
ANNUAL REPORT 2017 Income Statement Summary before tax (“PBT”) of RM2,748
The Bank’s top-line improved 8.9% y-o-y to RM4,551 million on the back of higher million, up 15.4%.
30
net interest income coupled with robust non-interest income performance. Operating profit before allowances
In FY2017, operating expenses declined 3.8% y-o-y to RM2,008 million. Excluding rose an impressive 21.6% y-o-y to

the one-off MSS costs recorded in FY2016, the underlying business as usual RM2,543 million.
(“BAU”) operating expenses was up 5% y-o-y primarily on the back of higher
personnel as well as IT costs. Notwithstanding that, CIR improved to 44.1% and
positive JAWS was attained as we continue to pursue strategic cost management
and channeling of some of the operational savings achieved towards new
investments that we believe would result in enhanced customer experience and
further efficiency gains going forward.

CORPORATE

Management Discussion & Analysis

RM’mil FY2016 FY2017 Change % b) Non-interest income
(YoY)
Net interest income 3,075 3,355 +9.1% Non-interest income in FY2017
Non interest income 1,103 1,196 +8.4% saw a healthy 8% y-o-y
Total income 4,178 4,551 +8.9% expansion to RM1,196 million
Operating expenses (2,087) (2,008) -3.8% supported by stronger wealth
Operating profit before allowances 2,091 2,543 +21.6% management income, dividend
Allowances for loans and other income from investments as
(43) (159) +>100% well as improved gains from
impairments 333 364 +9.2% Treasury operations.
Share of profits from associate & JV 2,382 2,748 +15.4%
Profit before tax (reported) 1,903 2,145 +12.7% Fee income was at RM609
Profit after tax (reported) 2,554 2,748 +7.6% million, a 1.2% y-o-y decline
Profit before tax (underlying)* 2,034 2,247 +10.5% mainly due to lower credit
Profit after tax (underlying)*^ card fees following increased
15 bps y-o-y to 2.09% versus market competition as well
Note 1.94% in the prior year. as lower interchange fees but
*: excluding one-off MSS costs of RM172 mil in FY2016 Yields were relatively stable (7 partly mitigated by strong
^ Excluding one-off impact of RM102 mil in FY2017 bps lower y-o-y) throughout growth in wealth management
the financial year despite the income.
As a result, operating profit before OPR cut last year attributed to
allowances rose an impressive selective loan pricing in some Furthermore, we have made
21.6% y-o-y to RM2,543 million. segments and products. good progress in our wealth
Loan and other impairment Cost of funds for the year management proposition
allowances increase to RM159 dropped by a larger 21 bps which saw income from this
million, giving rise to a net credit y-o-y primarily due to lower segment increase 35% y-o-y
charge of 13 bps for FY2017. Treasury funding and wholesale to RM121 million in FY2017. This
deposits cost, savings from had contributed 10% growth
Promisingly, profit contributions redemption of capital securities to total non-interest income
from our associates continued to as well as lower Fixed Deposit compared to 8% in the last
show positive traction and staged (“FD”) costs. financial year.
a recovery, up by 9.2% y-o-y to
RM364 million. Trading and Investment
income grew 60% to RM427
We achieved a record profit before million driven mainly by higher
tax (“PBT”) of RM2,748 million, up dividend income received from
15.4% y-o-y whilst corresponding our investments in wholesale
net profit after tax (“PAT”) grew a fund, coupled with higher
resounding 12.7% y-o-y to RM2,145 trading gains.
million compared to RM1,903
million in FY2016. Net Interest Income 19 bps y-o-y 15 bps y-o-y
Stable q-o-q
a) Net Interest Income 1.95% 2.01% 2.08% 2.14% 1.94% 2.09%
801 833 856 2.14% 3,075
Net interest income performed RM’mil 9% y-o-y
commendably, rising for four 774 12% y-o-y 3,355
consecutive quarters in a 1% q-o-q
row to achieve a 9% y-o-y HONG LEONG BANK BERHAD
increase to RM3,355 million, 864 ANNUAL REPORT 2017
underpinned by lower funding
cost and coupled with prudent Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 FY2016 FY2017 31
loan pricing which helped to NIM
mitigate some of the impact
of Bank Negara Malaysia’s OPR
cut. Correspondingly, NIM rose

Net Interest Income

CORPORATE

Management Discussion & Analysis

Non-Interest Income 44.1% compared to 45.8%
(excluding the one-off MSS
RM’mil 2266.4.%4% 2266.3.%3% costs) in the corresponding
1,196 period last year.
1,103 6688 Wealth Management Income Personnel costs, which
6688 accounted for 55% of total
115511 9911 operating expenses, declined
10% y-o-y to RM1,112 million
26688 442277 in FY2017. When adjusted
– exclusion of the one-off
Fee Income: FY2016 FY2017 35% MSS costs of RM172 million
of which RM89 mil RM121 mil in FY2016, personnel costs
actually increased 5% y-o-y
61177 60099 as we continued to invest in
talent acquisitions, a critical
FY2016 FY2017 component to support business
growth.
Fee Income Trading & Investment Establishment costs rose
Forex Islamic and others 10% y-o-y to RM484 million,
Non Interest Income ratio representing 24% of total
operating expenses, primarily
Foreign exchange (“FX”) c) Operating expenses due to increased investment
income was lower at RM91 For FY2017 operating expenses in information technology to
million compared to the support the Bank’s digitisation
previous financial year due to reported a decline of 4% y-o-y initiatives. Marketing expenses
higher FX swap activities that to RM2,008 million. in-turn fell 4.2% y-o-y to RM156
resulted in increased swap cost Underlying operating expenses million in FY2017, making
(which in return, benefited our (which excludes the one-off up 8% of total operating
net interest income) as well as MSS costs incurred in FY2016) expenses. Administration and
lower FX franchise income from remained well managed, general expenses for FY2017
lower hedging volumes from increasing 5% y-o-y when were relatively stable at RM256
lower volatility in the RM/USD compared against revenue million, accounted for the
FX in the second half of the growth of 9%. Consequently, remaining 13% of the Bank’s
year. CIR for FY2017 improved to total operating expenses.
The Bank remained focused on
Opex its strategic cost management
exercise where savings
45.8% * Composition of Operating Expenses from the MSS in FY2016
were channelled into the
2,087 44.1% Admin & Personnel implementation of digitisation
172 general cost initiatives across the Bank.
253 2,008 55 % HLBB’s on-going digitisation
162 256 13% exercise is expected to yield
HONG LEONG BANK BERHAD 438 156 Marketing numerous long-to-medium
ANNUAL REPORT 2017 484 term benefits that include the
1,061 8% simplification of processes,
1,112 reduce redundancy, reduction
Establishment of turn-around time (“TAT”),
24% thereby increasing the overall
efficiency across the Group.
FY2016 FY2017 FY2017

Personnel cost Establishment
Marketing Admin & general
MSS CIR

32 Note
*: excluding one-off MSS costs of RM172 mil in FY2016

CORPORATE

Management Discussion & Analysis

BALANCE SHEET ANALYSIS
a) Gross Loans, Advances and Financing
Healthy loan growth driven by development in our key segments

Gross Loans, Advances and FY2016 FY2017 Growth %
Financing by domicile RM’million % Contribution RM’million % Contribution
3.1%
Total Domestic Operations 114,978 95% 118,561 95%
17.0%
International Operations of which 5,627 5% 6,585 5%
15.0%
Singapore 4,679 4% 5,379 4% –
Hong Kong 34 <0.1% – –
Vietnam 388 0.3% 2.6%
Cambodia 526 0.4% 398 0.3% 53.7%
808 0.6%
Total Group
120,605 100% 125,147 100% 3.8%

• Gross loans, advances and financing grew 3.8% y-o-y to RM125.1 billion, led predominantly by growth in the Bank’s key
segments of domestic retail and SME in addition to international operations.

• Domestic loans, which represented 95% of the Bank’s total loan book, grew 3.1% y-o-y to RM118.6 billion as at FY2017.
• Singapore and Cambodia led our international operations accelerating 17.0% y-o-y to RM6.6 billion.

FY2016 FY2017 Domestic
Market
Gross Loans, Advances and RM’million % Contribution RM’million % Contribution Share %
Financing by Key Segments to Group to Group Growth %
Residential Properties (Group)
Transport Vehicles (Group) 51,510 43% 56,861 45% 10.4% 11%
SME (Group)
18,446 15% 17,584 14% -4.7% 9%

19,226 16% 20,377 16% 6.0% 7%

• Residential mortgages, contributing 45% of the Bank’s total loan portfolio, grew 10.4% y-o-y to RM56.9 billion HONG LEONG BANK BERHAD
underpinned by healthy loan pipe-line and ahead of industry performance despite the softening property market. ANNUAL REPORT 2017
Currently, HLB has a domestic market share of 11%.

• Transport vehicle loans represented 14% of total loans and were lower at RM17.6 billion as a result of sluggish industry
growth during the financial year. The Bank has a domestic market share of 9%.

• Loans and financing to SME, a key segment, continued to grow at a healthy pace of 6.0% y-o-y to RM20.4 billion,
representing 16% of the Bank’s loan base. This segment currently has a 7% domestic market share.

33

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Management Discussion & Analysis

b) Asset Quality
Our asset quality continues to out-perform industry average

Gross Impaired Loans Ratio (“GIL Ratio”)

1.95% 1.76% 1.61% 1.63% 1.63%
1.40% 1.18% 0.96%

0.84% 0.79%

FY2013 FY2014 FY2015 FY2016 FY2017
GIL Ratio
Industry GIL ratio

• Whilst GIL ratio increased to 0.96% in FY2017 following prudent credit
management and provisioning of a few isolated corporate/SME accounts,
the Bank’s asset quality remained broadly stable with no significant stresses
observed in any of our portfolio. Our GIL ratio is still one of the lowest in the
industry and remains below the industry average of 1.6%. Uphold our strong
asset quality remains a key priority and metrics and we aim to maintain a
GIL ratio at less than 1% going forward.

Asset Quality By Key Segments FY2016 FY2017 Industry Average
0.45% 0.54% as at June 17
Residential Properties (Group) 0.79% 0.81% 1.12%
1.42% 1.49% 0.88%
Transport Vehicles (Group) 2.39%*

SME (Group)
Note*: industry average as at latest available (March 17)

• Asset quality of residential properties, transport vehicles and SME – our key segments, continued to show healthy GIL
ratios of 0.54%, 0.81% and 1.49% respectively, still below the industry average.

HONG LEONG BANK BERHAD
ANNUAL REPORT 2017

34

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Management Discussion & Analysis

Loan Impairment Coverage

• Loan impairment coverage Provisions + Securities 177% 181%
(“LIC”) was at 96% and is still made on pledged 136%
ahead of industry. However,
when computed to include the GIL
regulatory reserve which is in
accordance with BNM’s Policy Made up 148% GIL coverage
Document on Classification
and Impairment Provisions 131% 129% 151%
for Loans/Financing, LIC for 96%
the Group would be higher at 120%
151%.
100% 101%
• We had prudently impaired
some accounts deemed as 89% 85% 84%
high risk which had resulted
in a drop in coverage ratio.
However, as most of these
accounts are highly securitized
loans, minimal provisions were
required.

FY2013 FY2014 FY2015 FY2016 FY2017
LIC Industry LIC
LIC ( Incld reg reserve)

c) Customer Deposits
Expansion in deposit growth driven by strong retail franchise, complemented by digitisation

Customer Deposits by Domicile FY2016 FY2017 Growth %
RM’million % Contribution RM’million % Contribution
Total Domestic Operations 3.8%
141,107 95% 146,470 94%
International Operations of which 18.1%
7,417 5% 8,763 6%
Singapore 12.4%
Hong Kong 6,257 4% 7,035 5% 109.8%
Vietnam 172 0.1% 362 0.2% -4.5%
Cambodia 538 0.4% 514 0.3% 89.9%
449 0.3% 852 0.5%

Total Group 148,524 100% 155,233 100% 4.5%

• Deposits from customers grew 4.5% y-o-y to RM155.2 billion, driven mainly by growth in core customer deposits, HONG LEONG BANK BERHAD
domestically and regionally spurred in part by the Bank’s deposit initiatives via the digital channels. ANNUAL REPORT 2017

• Domestic customer deposits represented 94% of the Bank’s total deposits which grew 3.8% y-o-y to RM146.5 billion,
whilst our international operations expanded a robust 18.1% y-o-y, driven by mainly by Singapore (12.4% y-o-y) and
Cambodia (89.9% y-o-y from a small base) operations, respectively.

35

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Management Discussion & Analysis

FY2016 FY2017 Domestic
% Contribution Market
Customer Deposits by key % Contribution Share %
product and customer type RM’million to Group RM’million to Group Growth %
By key product type of deposits 8%
Demand and Savings Deposits 37,185 25% 38,764 25% 4.2% 10%
(CASA)
Fixed Deposits 84,719 57% 87,976 57% 3.8%

Total Core Deposits (Group) 121,903 82% 126,741 82% 4.0% 8%

By key type of customers 81,353 55% 86,176 56% 5.9% 12%
Individual 62,697 42% 63,340 41% 1.0% 7%
Business enterprises 148,524 100% 155,233 100% 4.5% 9%

Total Customer Deposits (Group)

• Core customer deposits comprising demand deposits, savings deposits and fixed deposits made up 82% of our total
customer deposits base. Our core deposits expanded 4.0% y-o-y for a 8% market share whilst CASA (low cost deposits)
which comprised 25% of our total customer deposits grew at 4.2% y-o-y to RM38.8 billion.

• The Bank’s stable funding base continued to be supported by its strong retail deposit franchise, with individual deposit
expanding 5.9% y-o-y to RM86.2 billion. This 56% individual deposit mix is the highest in the industry.

d) Liquidity Position
Astute liquidity management provides buffer and supports future growth

81.1% 82.7% 84.0% 89.2% 91.3% • The Basel III liquidity
requirement - Liquidity
78.6% 80.0% 80.9% 81.2% 80.6% Coverage Ratio (“LCR”), was
designed to ensure that a bank
FY2013 FY2014 FY2015 FY2016 FY2017 maintains an adequate level
HLB LDR of unencumbered, high quality
Industry LDR assets that can be converted
into cash to meet liquidity
HONG LEONG BANK BERHAD • The Bank continues to adopt a prudent LDR ratio of 80.6% which provides a needs for a 30-day window
ANNUAL REPORT 2017 balance between liquidity needs and at the same time remains supportive when it occurs during an acute
of future business growth. liquidity stress scenario as
specified by the regulators.
FY2016 FY2017 Minimum Minimum The full implementation of LCR
requirement requirement would be for banks to have
in Year 2017 by Year 2019 a minimum of 100% by year
2019.

• As at 30 June 2017, the Bank
complied with the requirement
with a LCR of 137% surpassing
the minimum requirement of
80% for Year 2017.

LCR 114% 137% 80% 100%

36

HONG LEONG BANK BERHAD 37
ANNUAL REPORT 2017

CORPORATE

Management Discussion & Analysis CAPITAL MANAGEMENT

CORPORATE

Management Discussion & Analysis

INTRODUCTION a. Comprehensive Risk Assessment sufficient capital above regulatory
The Hong Leong Banking Group capital under ICAAP requirements and to remain
management framework was designed resilient under stressed economic
to ensure that the Group and its principal The Group achieves these objectives conditions.
subsidiaries maintain sufficient capital through the ICAAP which involves b. Bi-Annual Capital Plan
consistent with each entity’s respective a comprehensive assessment of The Bi-Annual Capital Plan involves
risk profile, management targets and all all material risks that the Group is detailed planning of the Group’s
applicable regulatory standards as well exposed to as well as an evaluation strategic capital plan over a
as guidelines. of the adequacy of the Group’s minimum of three-year horizon.
The Group is pro-active in the assessment capital to support its business The plan highlights the capital
and management of its capital adequacy activities in relation to those risks. projections, capital requirements,
against a series of internal quantitative levels of capital and capital
capital goals, designed to evaluate Stress scenarios are applied onto composition that aligns to the
the Group’s capital levels in expected the Group’s base case derived from Group’s business plan and strategic
and stressed economic environments annual budget business growth to objectives. In addition, it covers
under the Internal Capital Adequacy assess the level of capital required regulatory considerations including
Assessment Framework (“ICAAP”). under stressful economic situations capital buffers, new accounting
The capital management framework or a down-turn. standards as well as expectations
aims to: of key stakeholders such as
• Maintain capital ratios at levels Based on these assessments and regulators, investors, analysts and
formulation of capital plans, the rating agencies, business growth
above the regulatory minimum Group will calibrate and set the and stress test results.
or internal capital threshold, internal capital targets which are
whichever is higher; reviewed annually to maintain
• Support the Group’s strong credit
ratings; The Group’s capital management is guided by robust
policies and procedures across the group.

• Be flexible towards future strategic
opportunities;

• Deploy capital efficiently to business
and optimise return on capital; and

• Be resilient during stressful
economic and financial conditions.

HONG LEONG BANK BERHAD CAPITAL MANAGEMENT FRAMEWORK
ANNUAL REPORT 2017 The Group’s capital management is
guided by robust policies and procedures
across the group. The Group’s approach
to managing capital is detailed out in
the ICAAP which are approved by the
Senior Management, Risk Management
Committee (“RMC”) and the Board.

38

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Management Discussion & Analysis

CAPITAL INITIATIVES Capital Ratio of 6.0% and Total Capital Ratio of 8.0%. In addition, BNM introduced the
The Group exercises pro-active Capital Conservation Buffer (“CCB”) of 2.5% that is being phased in from 1 January
management of its capital position 2016 to 1 January 2019.
to address stringent Basel III capital Besides the Capital Conservation Buffer, BNM also introduced the Counter-cyclical
requirements, expectations from Capital Buffer ranging between 0% and 2.5% of total risk-weighted assets. The
stakeholders and to align with strategic Counter-cyclical Capital Buffer is determined as the weighted average of the
business objectives. prevailing Counter-cyclical Capital Buffer requirements to be applied in jurisdictions
Major initiatives undertaken over the where the banking institution has credit exposures.
years include: Additionally, BNM may introduce supplementary loss absorbency requirements for
i) Equity Capital Domestic Systemically Important Banking Institutions (“D-SIBs”) in the future. On
In December 2015, Hong Leong Bank 10 October 2016 BNM initiated a survey to develop a frame-work on Domestically
Systemically Important Banks (“D-SIB”) with the view to implement it in the near
completed its rights issue exercise future.
amounting to RM 2.99 billion which
had further strengthened the Bank’s Regulatory Minimum Capital Requirements and CCB (%)
Common Equity Tier 1 (“CET 1”) to
support continuous business growth CET 1 Capital Conservation Buffer (CCB) Additional Tier 1 Tier 2
with strong capital buffer under the
Basel III capital framework.

As at June 2017, the Bank held 41 2.000 2.000 2.000 2.000 2.000
million treasury shares that had 1.500 1.500 1.500
been bought back previously. These 1.500 1.500 2.500
shares which are available for sale 0.625 1.250 1.875
can further strengthen the Group’s
and the Bank’s CET 1.

ii) Debt Capital 4.500 4.500 4.500 4.500 4.500

The Group strengthened its Tier 2 2015 2016 2017 2018 2019
capital through Hong Leong Bank
which established a RM10 billion HEALTHY CAPITAL ADEQUACY RATIOS
Basel III – Compliant Multi Currency The table below shows the capital adequacy ratios of the Group and the Bank,
Tier II Subordinated Notes and presenting figures for financial years 2016 and 2017.
issued the first tranche of RM500
million in June 2014. Additionally, After proposed HLB Group HLB Entity Regulatory Min
Hong Leong Islamic also established dividend with CCB
a RM1 billion Basel III – Compliant FY2016 FY2017 FY2016 FY2017 HONG LEONG BANK BERHAD
Subordinated Sukuk Ijarah and CET 1 12.7% 13.3% 12.0% 12.5% FY2017 FY2019 ANNUAL REPORT 2017
issued the first tranche of RM400 Tier 1 13.1% 13.7% 12.5% 13.0% 5.75% 7.00%
million in June 2014. Total Capital 14.7% 15.8% 14.4% 15.4% 7.25% 8.50%
9.25% 10.50%
CAPITAL ADEQUACY RATIO
Bank Negara Malaysia (“BNM”) exacts Healthy Dividend payout
the compliance of its Capital Adequacy
Framework (“Capital Components”) The Group does not have a fixed dividend pay-out policy but takes into consideration a 39
for the determination of capital and balance between growth and proactive capital management to ensure the long-term
computation of capital adequacy ratios sustainability of dividends to its shareholders. The Board has proposed a final dividend
(“CAR”). This framework necessitates of 30.0 sen per share, bringing the total dividend to 45.0 sen for the FY2017, a 4.0 sen
that banks maintain the regulatory increase compared to FY2016, representing a stable dividend payout ratio of 43%.
minimum CET 1 ratio of 4.5%, Tier 1

 

HONG LEONG BANK BERHADCORPORATE
ANNUAL REPORT 2017
Management Discussion & Analysis

BUSINESS OPERATIONS REVIEW

40

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Management Discussion & Analysis

1) PERSONAL FINANCIAL SERVICES 500,000 users during the year. The position us positively in the HONG LEONG BANK BERHAD
(“PFS”) number of new registered Online market. During the financial ANNUAL REPORT 2017
Banking users also grew 88% year under review, our Direct
PFS remained the largest contributor y-o-y while 62% of the Bank’s Sales team were equipped 41
to the Group making up 56% and total transactions were performed with Loan2Go, a tablet
41% of its revenue and pre-tax digitally via Hong Leong Connect computer that provides an
profits, respectively. For the year, Internet Banking and Connect off-site auto loan application
retail loans and deposits grew 5% Mobile App. Given the encouraging platform, offering both dealers
and 6%, respectively whilst asset take up rate of our Digital Banking and customers a convenient
quality remained solid as reflected platforms, PFS will be looking to and easy to use auto loan
by its low GIL ratio of 0.6% achieved introduce more digital offerings in application experience. We
on the back of disciplined lending the new year. have also digitised our back-
and prudent risk management. • PFS Loans room processes to further
Despite a slower property improve efficiency and turn-
Some of the key highlights for the around time for customer
year include: market in FY2017, HLB’s applications.
mortgages out-performed the Credit card balances increased
PFS had piloted a tablet-based industry by growing 9% y-o-y 6% y-o-y mainly driven by
solution at six HLB branches in which had allowed the Bank attractive campaigns for
April 2017 targeted at enhancing to maintain its position as one credit line and card utilisation.
customer experience by reducing of the top three lenders in this Some of the notable
wait time and queues at our segment. campaigns launched during
branches. A walk-in customer Home & Living Proposition the financial year included
would receive immediate service is a clear differentiator and the #100HappyDays campaign
by our branch ambassadors (“BA”) one of the Bank’s best selling which rewarded 100 customers
and information on the customer is mortgage products which is each day for 100 days. Another
made available at the convenient an all in value proposition for successful promotion was the
touch of a button which will then the customer which provides “raining money” campaign.
enable the BA the opportunity to home-owners with more than PFS took to the ground at more
hold meaningful conversations on just a financing solution and than 70 branches nationwide
products and services offered by also comes with value added with this campaign and money
the Bank with the customer. offers from relevant retailers was literally raining from the
in the home & living industry. ceiling of the branch when a
The Bank launched a revamped PFS will continue to explore randomly selected customer
corporate website in June 2017 offering customer-centric add- performs a transaction at a
offering a more personalised ons via our digital platform in chosen branch. The campaign
customer experience, multi-lingual line with the Bank’s strategy – videos were then posted on
support function and new features Digital at the Core. the Bank’s website and on
such as credit card recommender Given our fairly sizeable YouTube, the latter garnering
and comparison feature. The 10% market share of the over 1.3 million viewership.
new website also features online auto financing business, this • PFS Deposits & Debit Cards
applications to facilitate customers segment remains one of Retail deposits grew 6% y-o-y
self-service. When applying for the Bank’s key retail lending driven largely by the focused
Personal Loans, Credit Card or segment despite a subdued offering of deposit products
Current and Savings Account online, market which has clearly been such as BizOne Account for
the customers now have the option affected by softer consumer the Community Banking
of attaching supporting documents sentiment. PFS continues to Business (Micro SMEs) and
via the website as an added strengthen its relationship the Harvest Savings Account
convenience and to speed up the with established key dealers, for the Grey Hair (customers
application process. simplify processes and improve age 50 years and above)
turn-around time via our digital segments. Both products were
We have also seen significant capabilities to continue to well received and recorded
traction in the numbers of new
users for the HLB Connect Mobile
Apps which doubled up to almost

CORPORATE

Management Discussion & Analysis

double digit growth as we Leong Asset Management
continue to deepen our reach to drive higher asset under
and penetration into these management growth. PFS
segments. will continue to expand its
product offerings and improve
Our debit card business also on its distribution capabilities
saw a 12% y-o-y growth including wealth management
in its customer base and a solutions via the digital
41% increase in number of channel.
transactions from the year
before which clearly show an • Priority Banking
increasing trend in debit card
utilisation as an alternative to Plans are under-way to
cash. This is also in line with launch a new customer value
BNM’s objectives of promoting proposition for our Priority
the use of debit cards and Banking customers with strong
as such, PFS will continue to emphasis on building and
focus on increasing our debit strengthening the capabilities
cards base through awareness of our Priority Relationship
programmes and campaigns to Managers as service-oriented
promote its usage. bank officials and wealth
management professionals.
• Retail Wealth Management
Services The refurbishment of our
Priority Banking centres is
The financial market has been also on-going with a focus on
extremely volatile which is building new hubs that will
a cause for concern to our serve as customer experience
investors. With this in mind, centres. The first revamped
our focus at PFS Wealth Priority Banking hub will
Management is to provide be located in Menara Hong Continued focus will be to grow
our customers with peace of Leong at Damansara City, CBB through active customer
mind via principal-protected Kuala Lumpur which will acquisition programmes and
investments and suitable serve as a flagship centre further product enhancements.
Bancassurance products that offering a conducive banking
meet their needs. On-going environment with a full suite of 2) BUSINESS & CORPORATE BANKING
micro seminars and road- wealth management services (“BCB”)
shows were held nation-wide for our priority customers.
throughout the financial year FY2017 has been a challenging year
to engage customers and • Community Business for the Bank’s BCB division amidst
educate them on their wealth Banking a more cautious approach adopted
management, retirement, by businesses in view of the fairly
financial planning and Community Business Banking muted business sentiment which
protection needs. This strategy (“CBB”) continues to deliver has been affected by uncertainties
has proven to be effective consistent strong performance in the external macro environment.
and had delivered positive over the last 2 years. Its
business results. The Retail continued deposit and loan Despite a 2% y-o-y decline in loan
HONG LEONG BANK BERHAD Wealth Management segment base traction have been base as a result of unscheduled
ANNUAL REPORT 2017 achieved a strong income impressive, growing 28% and corporate repayments, BCB still
growth of 27% y-o-y through 181%, respectively, albeit from managed to achieve an improved
these strategic initiatives. a small base. CBB leverages on top-line of RM1.1 billion for FY2017
HLB’s extensive branch network attributed to improved NIMs on
Going forward, PFS will be to expand its business reach discipline loan pricing and reduction
working closely with Hong into the communities that of expensive corporate deposits.
42 Leong Assurance and Hong the branch network serves. BCB remains a significant contributor

CORPORATE

Management Discussion & Analysis

to the Bank, representing 24% and platform (“Connect Biz”) 2 years and economic conditions further
26% of the Bank’s revenue and ago and it continues to maintain weaken in the near to mid-term.
profit before tax, respectively. excellent traction with an 3) GLOBAL MARKETS (“GM”)
As part of its overall business encouraging 22% y-o-y growth in The GM business operates across
expansion strategy, BCB will be its user base whilst corresponding five markets - Malaysia, Singapore,
looking to further expand into key transaction volumes also saw a Hong Kong, Vietnam and Cambodia.
sectors such as the healthcare 28% y-o-y growth coupled with a We are a key product partner for
industry, manufacturing, wholesale 9% rise in total transaction values the PFS and BCB clients in our core
and retail trade, construction and in FY2017. BCB will be launching its products of Foreign Exchange (FX),
selective participation in suitable new cash management system, HLB Fixed Income, Derivatives and
contract financing projects to boost Connect First sometime in FY2018, Structured Products.
loans growth and fee income in with the expectation that this new GM also manages the Bank’s excess
FY2018. system will further augment BCB’s liquidity and capital through its
The Bank continues to recognise capabilities to support and manage various investments in Fixed Income
the importance of the SME segment its clients’ operating account and and Money Market instruments.
and its immense contribution to the liquidity needs. BCB hopes that GM ended the year with a solid
economic growth of the country as the new system will also help HLB top-line and PBT of RM520 million
we continue to make inroads into secure new corporate and SME and RM406 million, respectively
this segment. We also realize the customers as well as their operating for FY2017 which represented an
tactical and strategic importance accounts and consequently 11% and 15% contribution to the
of our branch network nation-wide establish itself as the preferred Bank’s total income and PBT. This
which plays an important role in financial solution provider to our was achieved on the back of strong
the expansion of our SME business. corporate customers. BCB will also momentum from PFS, Islamic and
Our strategically located branches be looking to continue leveraging GLC/FI franchise sales and improved
will enable us to better serve on the Group’s strategic alliances return on the MYR investment
the local business communities with Hong Leong Investment Bank, books. Heightened market volatility
where we are present. We have Hong Leong Islamic Bank and in the last quarter of 2016 helped
positioned 33 Retail Community Global Markets to complement its drive revenues as well.
Business Managers located at already diverse suite of products Notably, GM’s performance was
selected HLB and HLISB branches and services to cater to the lauded by the accolades it had
to serve SMEs with financing, growing business complexity of our received from leading publications
deposit and wealth solutions. This corporate clients’ needs. such as The Asset and Asiamoney in
is to be further strengthened with During the year, some provisions recognition of its foreign exchange
the deployment of 150 Community were made to address certain and fixed income sales and trading
Banking Managers at HLB branches exposures that we had in the oil business.
nationwide within next financial and gas related industry. However, The team spent FY2017 helping
year, which will also increase our the Bank has been pro-actively our clients execute more treasury
coverage by approximately 5 times. managing and re-balancing its loan products through e-channels. We
In FY2017, the Bank’s SME loan book portfolios over the last couple of worked jointly with the PFS team
grew 6% y-o-y to RM20.4 billion. years to gradually reduce exposure to enable FX remittance through
BCB first introduced its transaction against the more volatile industries internet and publishing of FX rates
banking and cash management to ensure that the portfolio asset on mobile. The Bank’s new cash
quality does not deteriorate too management system, Connect First,
significantly should business will also have FX execution and
Short Term Corporate Placements
The Bank continues to recognise the importance of (“STCP”) capabilities. HONG LEONG BANK BERHAD
the SME segment and its immense contribution to ANNUAL REPORT 2017
the economic growth of the country as we continue
to make inroads into this segment.

43

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Management Discussion & Analysis

We have also substantially upgraded Malaysia for this segment and is commodity trading. Additionally,
compliance monitoring activities also supportive of Bank Negara the Bank launched Online CASA
to ensure long term sustainability Malaysia’s initiative to bring the Application via Connect Pre-Login
of our GM business with particular trading of Ringgit products onshore. that digitalises the CASA application
focus on transaction activities as 4) ISLAMIC BANKING process. During the period under
compared to portfolio monitoring to EMPOWERING ISLAMIC FINANCE review, HLISB initiated on-line
early detect any unusual activities. FY2017 ROE for Hong Leong Islamic application for Personal Financing-i
Bank (“HLISB”) was 11.6%, which via the HLISB website.
With higher global interest rates corresponds to a 10% y-o-y increase HLISB remains committed to
and a reversal of the US quantitative in PBT and a 12% y-o-y financing promoting and enriching Islamic
easing on the horizon, interest in growth. Additionally, operating finance capabilities and remains
emerging markets assets is likely expenses rose 8% versus a 18% confident that it can bring Islamic
to be anemic. Flows in and out of increase in net income which led to finance knowledge forward via our
Malaysia will be subdued leading to positive JAWS ratio. digital intermediaries to deliver
potentially less volatility in local FX The meaningful relationship that long-term value to the public
and fixed income markets. HLISB has built and nurtured and stakeholders. In response to
with government-related clients the increasing demand of Islamic
However, growth opportunities with had paved the way for HLISB to finance, we are developing a
our client base should continue as embark on innovative products that variety of Islamic products to cater
the Bank looks to further grow its addressed their specific needs. HLISB to different needs of customers. As
Commercial and SME loan book. In was quick to seize the opportunities had been carried out in the previous
addition to that, we look to expand to expand its customer base by years, HLISB remains steadfast in
our client penetration for Islamic providing Cashless ATM (“CATM”) enhancing Shariah governance
solutions as Hong Leong Islamic facility to several states in Malaysia. to facilitate business growth and
Bank is one of the few banks in HLISB have made significant robust Shariah risk management
Malaysia with a comprehensive progress in its digitalisation journey frame-work.
Islamic product suite. throughout FY2017. In the third As we progress to realise our goal,
quarter Q3FY17, we automated HLISB is committed to nurturing
Our growing overseas footprint Commodity Trading for Personal talent by developing learning tools
should also see increased FX and Financing-i which improved and offering continual training.
balance sheet activity. In Singapore, efficiency and eliminate errors We believe HLISB has strong
we feel that we can increase our throughout the whole process of fundamentals to drive organic
sales and trading activity with Non- growth, especially in digital
Bank Financial Institutions with banking, that would fuel growth in
focus on Ringgit and Singapore Islamic banking. HLISB is also well-
Dollar products. This complements positioned in delivering simplified
the success we have had in and digitalised services to our
customers that distinguish HLISB
among industry peers.

5) INTERNATIONAL

i) Bank of Chengdu (“BOCD”)

Profit contribution from BOCDHONG LEONG BANK BERHAD
have been improving for theANNUAL REPORT 2017
last 2 consecutive quarters and
for the year it has improved
9.8% y-o-y to RM343 million.
BOCD remains a significant
contributor towards the Group’s

44 PBT making up 12.5% of the
Group’s profitability and going

CORPORATE

Management Discussion & Analysis

forward, management of BOCD For the PFS division, HLBVN business and corporate clients HONG LEONG BANK BERHAD
is cautiously optimistic of continues to engage the such as telecommunications ANNUAL REPORT 2017
continued growth in selected regulators for new product business operators, insurers
business segments amidst & service development and and escrow transactions. 45
recent signs of stabilisation and also leverage on the HLB HLBCAM remains mindful of our
improvements in the Chinese Group’s digital capabilities primary focus of being Digital
economy. and technologies to expand at the Core and a number of
ii) HL Bank Singapore (“HLBS”) its reach and enlarge its new digital initiatives will be
Operating profit for HLBS for the customer base. For BCB, our launched for both PFS and BCB.
year ending Jun 2017 increased Vietnam subsidiary has begun The Bank is also considering
13% y-o-y to RM49 million an initiative to capture FDI the introduction of a new Auto
on loan balances that grew flows and support our targeted loan product whilst continuing
15% y-o-y to RM5.4 billion led customers’ eco-system by to pro-actively target the SME
by the auto loans segment. providing banking solutions to business segment to expand
HLBS has gained remarkable its suppliers and distributors. our loan book.
progress and market share with iv) Hong Leong Bank Cambodia Our strategy is to be present in
a loan book of RM2.8 billion (“HLBCAM”) the four key locations in Phnom
in AutoFinancing and medical After recording stellar growth Penh, targeting the SMEs, high
practice financing. HLBS is over the past three years, net worth individuals (HNI),
currently amongst the leading HLBCAM emerged profitable in affluent, emerging affluent
auto lender in Singapore since FY2017, a year ahead of plan. and young, tech-savvy mobile
starting this portfolio about 3 Total revenue grew 63% y-o-y professionals.
years ago. During the financial to RM39 million, significantly Hong Leong Bank Berhad (“The
year, the branch also launched out-pacing expenses growth Parent Bank”) has injected
its Internet banking with of 12%. Customer deposits RM83.9 million of additional
instantaneous funds transfer grew by RM403 million or 90% capital as at March 2017 and
capability. Amongst others, to RM852 million whilst loan another RM 80.5 million will
the branch has also re-located growth was up 54% or RM be injected by March 2018
to Guoco Tower - the tallest 282 million to RM808 million. to meet the new minimum
building in Singapore, in the The robust deposit growth capital requirement set by the
new financial district of Tanjong had improved HLBCAM’s LDR National Bank of Cambodia.
Pagar. Impairment remains position to below 100% for the v) Hong Kong Operations
minimal at 0.02% depicting the first time whilst CASA also saw (“HLBHK”)
quality of the assets of HLBS. a steady 179% increase. In FY2017, the Board endorsed
Our main thrusts for FY 17/18 HLBCAM has strengthened HLBHK’s repositioning and
is to embrace and implement its product offering via the realigning of its business to
initiatives to achieve our goal digital platform to roll- expand into new products and
of Digital to the Core, expand out products and services new segments. An external
our product offerings, augment such as E-Saver, Kids Saver consultant was engaged to
collaboration with HLB Group account and Mini Mach on- work with the team as we
as well as drive profits and loan line account. The bank also embark on the new business
growth. Additionally, we aim to partnered with Major Cineplex ventures targeting the micro
serve Singapore’s vibrant SME at AEON Mall (the largest and community SMEs. Our
segment. shopping mall in Cambodia) to priority for the new financial
iii) Hong Leong Bank Vietnam promote HLBCAM’s presence year is to implement a new
(“HLBVN”) and product offering through system which will allow HLBHK
HLBVN continues to focus sales activations and online to underwrite loans, enhance
on growing both PFS & BCB account opening organised on its efficiency and align the
businesses without further weekends. At the same time, branch with the Group’s digital
compromising on asset quality. BCB introduced a dedicated initiatives.
Relationship Manager for
deposit-gathering to target

HONG LEONG BANK BERHADCORPORATE
ANNUAL REPORT 2017
Management Discussion & Analysis

INFORMATION TECHNOLOGY

46

CORPORATE

Management Discussion & Analysis

CYBER SECURITY AND DATA PRIVACY information is used to develop relevant For the period ended FY17, the Bank HONG LEONG BANK BERHAD
As the world becomes more digitised, ‘indicators of compromise’ as an had invested RM2.5 million in terms of ANNUAL REPORT 2017
there is an ever-increasing threat of effective mechanism to detect potential CAPEX to ensure it remains robust in the
important data being accessed via threats early and prevent any critical Bank’s IT security posture.
unauthorised means, generally with security risk. Development Centre of Excellence
malicious intent. High-profile security In addition to protecting the Bank Information technology (“IT”) also plays
breaches have pushed the need for from cyber threats, we also ensure an integral role in the Bank’s digital
cyber security as a top international the protection of personal data which transformation journey in a rapidly
priority to protect the global economy. includes data of our customers and evolving banking industry where we
At the corporate level, in addition to employees, as required under the are helping our customers embrace
commercial losses and public relations Personal Data Protection Act 2010 opportunities in an increasingly
problems, disruption of operations and (“PDPA”), Financial Services Act 2013 connected world by providing them
the possibility of extortion, cyber attacks (“FSA”) and Islamic Financial Services with highly secure, convenient and
expose an organization to regulatory Act 2013 (“IFSA”). We are committed to automated digital banking solutions
action, negligence claims, the inability ensuring the confidentiality and security which in turn emphasizes the increased
to meet contractual obligations and of personal data and maintain a Privacy need for the Bank to strengthen its
loss of trust among customers and Policy on our website so that employees ability to design and build its front end
suppliers. We recognize this threat, and and customers understand how we systems in house.
have implemented various measures collect, use and manage personal data. In response to this, the Bank has
to safeguard our corporate as well as We make continuous efforts to enhance undertaken a strategic initiative to
customers’ data. our compliance program on protecting assemble a Development Centre of
At the core of our Cyber Security efforts customer and employee data. Initiatives Excellence (“CoE”), which was made up
lies the Information Security Governance include: of a few key specialized teams including
Committee Council (“ISGCC”). Set up i) Upon joining the Bank, new UIUX designers, business analysts,
in November 2016, it is chaired by the middleware integration team, iOS and
GMD/CEO with the forum attended employees attending the manager’s Android as well as JAVA development
by the GMD/CEO’s direct reports. This induction are given an introductory teams working together with the
Council acts as a cornerstone to ensure session on PDPA and secrecy laws business team to enhance as well as
that IT/Cyber Security has management under FSA/IFSA. develop products and services which
awareness and oversight, which ii) For all existing employees, will augment customer experience and
includes overseeing the progress of in addition to the mandatory allow the Bank to be more agile and
IT Security control implementation, e-learning on the PDPA and nimble in responding to the market.
escalations and information security IFSA/FSA, we have developed We believe this would provide us with
threat management. a Customer Data Secrecy Video, the leading edge by enhancing the
Internally we have installed an Anti- which uses stimulating animation Bank’s prototyping capabilities as well
Persistent Threat mitigation platform to demonstrate the different as intellectual property ownership and
to understand the evolving forms of instances of possible breaches reduce support costs for the Bank in the
threat posed by hackers and fraudsters, and the importance of protecting long run.
detect these as well as prevent them the confidentiality and security of With this new capability within the
from infiltrating our systems. Externally, personal data. Bank, it would provide us the flexibility
we have engaged a reputed Security For the purpose of highlighting specific in creating new applications moving
Operations Centre with regional measures which could be adopted forward, the current Hong Leong Connect
expertise to monitor the cyber space to avoid breaches, we have issued is already completely developed and
and enhance our own vigilance. a General Circular on the subject of supported by the team, and the first
We also keep track of cyberattacks on Safeguarding Customer’s Information mobile application will be launched in
a global scale, and work closely with and Bank Documents outside the the Cambodian market this year.
our partners to obtain intelligence from Bank’s Premises. We are committed to
other countries around the world. Such developing compliance activities and
strengthening our efforts in this area.

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HONG LEONG BANK BERHADCORPORATE
ANNUAL REPORT 2017
Management Discussion & Analysis

HUMAN RESOURCE (“HR”)

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