HL 2018

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CORPORATE GOVERNANCE OVERVIEW,
RISK MANAGEMENT & INTERNAL CONTROL statement

C. BOARD COMMITTEES (CONTINUED)

(c) NC (continued)

(iii) Board Committee Appointments

The nomination, assessment and approval process for appointments to Board Committees (“Board Committee
Appointments”) is as follows:

Identification of Directors • Assessment against Assessment Deliberation by the
for Board Committees Criteria and BNM Guidelines Board and decision
membership thereof
• Recommendation by the NC

The assessment for Board Committee Appointments will be based on the Directors’ potential contributions and
value-add to the Board Committees with regard to Board Committees’ roles and responsibilities.

In addition, a formal evaluation process has been put in place to assess the effectiveness of the Board as a
whole, the Board Committees and the contribution and performance of each individual Director on an annual
basis (“Annual Board Assessment”) in conjunction with the annual F&P assessment of the Chairman, Directors and
GMD/CEO per BNM Guidelines. The NC will deliberate on the results of the Annual Board Assessment and submit
its recommendation to the Board for consideration and approval. For newly appointed Chairman, Directors and
GMD/CEO, the Annual Board Assessment will be conducted at the next annual assessment exercise following the
completion of one year service.

Assessment criteria for Board as a whole include, inter alia, the effectiveness of the Board composition in terms of
size and structure vis-à-vis the complexity, size, scope and operations of the Bank; the core skills, competencies and
experience of the Directors; and the Board’s integrity, competency, responsibilities and performance. The assessment
criteria for Board Committees include the effectiveness of the respective Board Committees’ composition in terms
of mix of skills, knowledge and experience to carry out their respective roles and responsibilities per the Board
Committees’ TOR and the contribution of Board Committees members. Each individual Director is assessed on, inter
alia, the effectiveness of his/her competency, expertise and contributions. The skills, experience, soundness of
judgment as well as contributions towards the development of business strategies and direction of the Bank and
analytical skills to the decision-making process are also taken into consideration.

For management succession planning, it has been embedded in the Group’s process over the years to continuously
identify, groom and develop key talents from within the Group. The Group also has a talent development programme
to identify, retain and develop young high potential talents.

The NC meets at least once in each financial year and additional meetings may be called at any time as and when
necessary.

During the financial year ended 30 June (“FYE”) 2018, two (2) NC meetings were held and the attendances of the
NC members were as follows:

Member Attendance

Ms Chok Kwee Bee 2/2

Mr Tan Kong Khoon 2/2

YBhg Dato’ Nicholas John Lough @ Sharif Lough bin Abdullah 2/2

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CORPORATE GOVERNANCE OVERVIEW,
RISK MANAGEMENT & INTERNAL CONTROL statement

C. BOARD COMMITTEES (CONTINUED) (d) Remuneration Committee (“RC”)

(c) NC (continued) The RC was established on 17 June 2003. The
composition of the RC is as follows:
The NC carried out the following activities in the
discharge of its duties in accordance with its TOR • YBhg Dato’ Nicholas John Lough @ Sharif
during the FYE 2018: Lough bin Abdullah (Chairman)

• Carried out the Annual Board Assessment and • YBhg Tan Sri Quek Leng Chan
was satisfied that the Board as a whole, Board
Committees and individual Directors have • YBhg Datuk Dr Md Hamzah bin Md Kassim
continued to effectively discharge their duties
and responsibilities in accordance with their The RC’s functions and responsibilities are set out in
respective TORs, and that the current Board the TOR which is published on the Bank’s Website.
composition in terms of Board balance, size and
mix of skills is appropriate and effective for the During the FYE 2018, three (3) RC meetings were
discharge of its functions. The NC took cognisance held and the attendances of the RC members were
of the merits of Board diversity including women as follows:
participation on the Board, in adding value to
the Bank. The NC will work towards increasing Member Attendance
women participation on the Board in line with
the MCCG; YBhg Dato’ Nicholas John Lough 3/3
@ Sharif Lough bin Abdullah
• Considered and assessed the position of
Independent Directors of the Bank and was YBhg Tan Sri Quek Leng Chan 2/3
satisfied that the Independent Directors met
the regulatory requirements for Independent YBhg Datuk Dr Md Hamzah 3/3
Directors; bin Md Kassim

• Reviewed the F&P Declarations by Directors and The Group’s remuneration scheme for Executive
GMD/CEO in line with the BNM policy document Directors is linked to performance, service seniority,
on F&P Criteria and was satisfied that the Directors experience and scope of responsibility and is
and GMD/CEO met the requirements as set out in periodically benchmarked to market/industry
BNM policy document on F&P Criteria; surveys conducted by human resource consultants.
Performance is measured against profits and targets
• Reviewed the term of office and performance of set in the Group’s annual plan and budget.
the BAC and each of its members in accordance
with the TOR of BAC and was of the view that The level of remuneration of Non-Executive Directors
the BAC and each of its members had carried out reflects the scope of responsibilities and commitment
their duties in accordance with the BAC TOR for undertaken by them.
the periods under review;
The RC, in assessing and reviewing the remuneration
• Reviewed the re-appointments of Directors packages of Executive Directors, ensures that a
in accordance with the F&P Policy, BNM CG strong link is maintained between their rewards
and MMLR and recommended to the Board for and individual performance, based on the provisions
consideration and approval; and in the Group’s Human Resources Manual, which
are reviewed from time to time to align with
• Reviewed and recommended to the Board for market/industry practices. The fees of Directors
adoption the revisions to the F&P Policy of the are recommended and endorsed by the Board for
Bank on tenure of Independent Directors, and approval by the shareholders of the Bank at its
criteria of Independent Directors. Annual General Meeting (“AGM”).

The detailed remuneration of each Director during
the FYE 2018 is as set out in Note 37 of the Audited
Financial Statements in this Annual Report.

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C. BOARD COMMITTEES (CONTINUED) 1. Fixed Pay (base pay and fixed cash allowances)

(d) Remuneration Committee (“RC”) (continued) Fixed pay is delivered at an appropriate level taking
into account skills, experience, responsibilities,
Remuneration competencies and performance; ensuring its
competitiveness vis-à-vis comparable institutions for
The Bank’s remuneration framework provides a attraction and retention purposes.
balanced approach between fixed and variable
components that change according to individual 2. Performance-based variable pay
performance, division performance, and the
Bank’s performance outcomes and individual Performance-linked variable pay in the form of
seniority/level and accountability. Such framework bonuses is paid out at the end of the Financial Year
is in alignment with Hong Leong Group’s total subject to the Bank’s performance and in recognition
compensation philosophy which promotes high of individual performance and key achievements
performing culture to deliver the Bank’s business during the year. It focuses on the achievement of
objectives, and this is applicable to all employees key objectives which are aligned to value creation
of Hong Leong Bank (inclusive of overseas/offshore for our shareholders and multiple stakeholders. A
offices where applicable). robust key performance indicators (“KPIs”) setting
process that incorporates risk management as part of
The framework includes a combination of cash and the scorecards are also in place to ensure excessive
non-cash elements such as shares or share-linked risk taking behaviours of staff is minimised and
instruments which is aimed toward achieving sufficient control mechanism are in place.
the desired long term business performance. It is
supported by a rigorous and robust performance 3. Long term incentives
management process that promotes pay-for-
performance and also incorporates risk and In addition, the Bank also recognises and rewards
compliance management (to fulfil risk control individuals for their contributions towards the
objectives) as part of the key performance indicators Bank’s long-term business achievements (both in
for remuneration decisions to ensure excessive risk- qualitative and quantitative measures) through a
taking behaviours of staff is minimised and sufficient combination of cash and non-cash (i.e. shares or
control mechanisms are in place. This is in alignment share-linked instruments) elements that are subject
with Hong Leong Group’s philosophy in driving long- to partial deferment over a period of time (typically
term sustainable performance of the company, in over a few years) with built-in clawback mechanism.
order to create sustainable financial performance
and value for the company and shareholders. The clawback mechanism can be triggered when
there are non-compliances to regulations and
In order to reinforce strong internal governance on the policies and where Management deemed necessary
performance and remuneration of Control functions due to achievements of performance targets that
(i.e. Risk, Audit and Compliance), the remuneration are not sustainable. Clawbacks are typically (and not
of these officers in Control functions are assessed limited to) applied in the case of Gross Misconduct,
independently from business units/functions they Financial Misstatements, Material Risks and/or
support to avoid conflict of interests. The Board Malfeasance of Fraud.
also plays an active oversight where the overall
performance and remuneration of these officers (in The variable portion of remuneration (both
addition to the GMD/CEO and Senior Management Performance-based variable pay and Long term
team) are to be reviewed and approved by the incentives) increases along with the individual’s level
Board Audit and Risk Management Committee of accountability. By subjecting an adequate portion
(BRMC) annually to ensure the incentives provided of the variable remuneration package to forfeiture,
by the remuneration system takes into consideration it takes into account potential financial risks that
risks, capital, liquidity, and the likelihood and timing may crystalise over a period of time, reinforces HLB’s
of earnings, without prejudice to the tasks of the corporate and risk culture in promoting prudent risk-
Remuneration Committee. taking behaviours.

Pay Mix Delivery and its Purpose 4. Employee Benefits and programmes

The overall Total Compensation for the GMD/CEO Employee benefits (e.g. screening, health and
and members of the Senior Management team medical, leave passage) are used to foster
generally includes base pay, fixed cash allowances, employee value proposition and wellness to ensure
performance-based variable pay, long term the overall well-being of our employees. These are
incentives, benefits and other employee programs. being reviewed annually to ensure HLB remains
competitive in the industry and that the employees
are well taken care of.

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CORPORATE GOVERNANCE OVERVIEW,
RISK MANAGEMENT & INTERNAL CONTROL statement

C. BOARD COMMITTEES (CONTINUED)

(d) Remuneration Committee (“RC”) (continued)

Remuneration Disclosure

The following depicts the total value of remuneration awarded to the GMD/CEO, Senior Management team and Material
Risk Takers for the FYE 2018:

Total amount

Total amount of outstanding

of outstanding deferred

deferred remuneration

remuneration paid out

No. of as at (vested)
officers
GMD/CEO, Senior Management received Unrestricted Deferred 30.6.2018 in FYE2018
and Material Risk Takers (RM’000) (RM’000)
Fixed Remuneration (RM’000) (RM’000)
Cash-based
Shares and share-linked instruments 31 28,142,373 – – –
Other
Variable Remuneration ––– – –
Cash-based
Shares and share-linked instruments ––– – –
Other
31 21,715,230 – – –
–
12 – 83,132,249 83,132,249 –

––– –

Note: The value of share is based on the valuation used for MFRS 2 Accounting.

D. INDEPENDENCE under the F&P Policy of the Bank. Pursuant to the Tenure
Policy, an Independent Director who has served on the
The Board takes cognisance of the provisions of the MCCG, Board of the Bank for a period of 9 years cumulatively
which states that the tenure of an Independent Director shall submit a Letter of Intent to the NC informing of his
should not exceed a cumulative term of 9 years and upon intention to continue in office or to retire from the Board
completion of the 9 years, an Independent Director may as an Independent Director, upon:
continue to serve on the Board subject to the Director’s
re-designation as a Non-Independent Director. It further (a) the expiry of his term of office approved by BNM; or
states that in the event the Board wishes to retain an
Independent Director who has served a cumulative term (b) the due date for his retirement by rotation pursuant
of 9 years and above, shareholders’ approval shall be to the Constitution of the Bank.
annually sought with justification. In the event the Board
wishes to retain an Independent Director who has served If the intention is to continue in office, the NC shall
a cumulative term of 12 years and above, shareholders’ consider based on the assessment criteria and guidelines
approval shall be annually sought through a two-tier set out in the F&P Policy and make the appropriate
voting process. recommendation to the Board. If the intention is to retire
from office, an application shall be made to BNM to seek
The tenure of all the Independent Directors on the Board clearance in accordance with BNM Guidelines. For public
of the Bank does not exceed 9 years. The Independent listed bank/companies under the Hong Leong Financial
Directors have declared their independence, and the NC Group, shareholders’ approval at AGMs shall be sought
and the Board have determined, at the annual assessment in accordance with the relevant requirements under the
carried out, that the Independent Directors have continued MCCG and the MMLR subject to favourable assessment of
to bring independent and objective judgment to Board the NC and the Board.
deliberations and decision making.
The Board seeks to strike an appropriate balance between
The Bank has in place a policy in relation to the tenure tenure of service, continuity of experience and refreshment
for Independent Directors of the Bank (“Tenure Policy”) of the Board. Although a longer tenure of directorship

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CORPORATE GOVERNANCE OVERVIEW,
RISK MANAGEMENT & INTERNAL CONTROL statement

may be perceived as relevant to the determination of a arrangement shall not be present at the board meeting
Director’s independence, the Board recognises that an where the material transaction or material arrangement is
individual’s independence should not be determined solely being deliberated by the Board.
based on tenure of service. Further, the continued tenure
of directorship brings considerable stability to the Board, The Board met eight (8) times for the FYE 2018 with timely
and the Bank benefits from Directors who have, over time, notices of issues to be discussed. Details of attendances of
gained valuable insight into the Group, its market and the Directors were as follows:
industry.
Director Attendance
E. COMMITMENT
YBhg Tan Sri Quek Leng Chan 8/8
The Directors are aware of their responsibilities and devote
sufficient time to carry out such responsibilities. In line Mr Tan Kong Khoon 8/8
with the MMLR, Directors are required to comply with the
restrictions on the number of directorships in public listed Mr Kwek Leng Hai 8/8
companies. Directors provide notifications to the Board for
acceptance of any new Board appointments. This ensures Ms Lim Lean See 8/8
that their commitment, resources and time are focused
on the affairs of the Bank to enable them to discharge Ms Chok Kwee Bee 8/8
their duties effectively. Board meetings are scheduled a
year ahead in order to enable full attendance at Board YBhg Dato’ Nicholas John Lough 8/8
meetings. Additional meetings may be convened on an @ Sharif Lough bin Abdullah
ad-hoc basis as and when necessary. Where appropriate,
decisions are also taken by way of Directors’ Circular YBhg Datuk Dr Md Hamzah bin Md Kassim 8/8
Resolutions. Directors are required to attend at least 75%
of Board meetings held in each financial year pursuant to YBhg Datuk Wira Azhar bin Abdul Hamid (1) 6/7
the BNM CG Policy.
Note:
All Board members are supplied with information in a (1) Retired on 14 May 2018.
timely manner. The Bank has moved towards electronic
Board reports. Board reports are circulated electronically The Bank recognises the importance of continuous
prior to Board and Board Committee meetings and the professional development and training for its Directors.
reports provide, amongst others, financial and corporate
information, significant operational, financial and corporate The Bank is guided by a Directors’ Training Policy,
issues, updates on the performance of the Bank and of which covers an Induction Programme and Continuing
the Group and management’s proposals which require the Professional Development (“CPD”) for Directors of the
approval of the Board. Bank. The Induction Programme is organised for newly
appointed Directors to assist them to familiarise and to
All Directors have access to the advice and services get acquainted with the Bank’s business, governance
of a qualified and competent Company Secretary to process, roles and responsibilities as Director of the Bank.
facilitate the discharge of their duties effectively. The The CPD encompasses areas related to the industry or
Company Secretary is qualified to act under Section 235 business of the Bank, governance, risk management
of the Companies Act 2016. She supports the effective and regulations through a combination of courses and
functioning of the Board, provides advice and guidance conferences. A training budget is allocated for Directors’
to the Board on policies and procedures, relevant rules, training programmes.
regulations and laws in relation to corporate secretarial and
governance functions and facilitates effective information All Directors of the Bank have completed the Mandatory
flow amongst the Board, Board Committees and senior Accreditation Programme.
management. All Directors also have access to the advice
and services of the internal auditors and in addition, to The Bank regularly organises in-house programmes,
independent professional advice, where necessary, at the briefings and updates by its in-house professionals. The
Bank’s expense, in consultation with the Chairman or the Directors are also encouraged to attend seminars and
GMD/CEO of the Bank. briefings in order to keep themselves abreast with the
latest developments in the business environment and to
At Board meetings, active deliberations of issues by enhance their skills and knowledge. Directors are kept
Board members are encouraged and such deliberations, informed of available training programmes on a regular
decisions and conclusions are recorded by the Company basis.
Secretary accordingly. A Director who has, directly or
indirectly, an interest in a material transaction or material The Bank has prepared for the use of its Directors, a
Director Manual which highlights, amongst others, the
major duties and responsibilities of a Director vis-a-vis
various laws, regulations and guidelines governing the
same.

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CORPORATE GOVERNANCE OVERVIEW,
RISK MANAGEMENT & INTERNAL CONTROL statement

E. COMMITMENT (continued) • Securities Commission – World Capital Markets
Symposium 2018: Renaissance of Capitalism: Markets
In assessing the training needs of Directors, the Board for Growth
has determined that appropriate training programmes
covering matters on corporate governance, finance, legal, • Securities Industry Development Corporation (“SIDC”) –
risk management, information technology, cyber security, 2018 Budget: Implications to the Malaysian Economy
internal control and/or statutory/regulatory compliance, and Capital Market
be recommended and arranged for the Directors to
enhance their contributions to the Board. • SIDC – Cyber Security: Cyber Proofing for the Next Wave

During the FYE 2018, the Directors received regular • Bursa Malaysia – Risk Management Programme: I am
briefings and updates on the Bank’s businesses, strategies, Ready to Manage Risk
operations, risk management and compliance, internal
controls, corporate governance, finance and any changes • ICLIF – CG Breakfast Series Entitled: Leading Change @
to relevant legislation, rules and regulations from in- The Brain
house professionals. The Bank also organised an in-house
programme for its Directors and senior management. • ICLIF – Understanding Liquidity Risk Management in
Banking
The Directors of the Bank have also attended various
programmes and forums facilitated by external • Malaysian Institute of Accountants – Capital Market
professionals in accordance with their respective needs in Conference 2017
discharging their duties as Directors.
• Asian Institute of Finance (AIF) – 9th International
During the FYE 2018, the Directors of the Bank, collectively Conference on Financial Crime and Terrorism Financing
or on their own, attended various training programmes, (IFCTF) 2017
seminars, briefings and/or workshops including:
• Khazanah Nasional – Khazanah Megatrends Forum
• FIDE Forum – Fintech: Opportunities for the Financial 2017
Services Industry in Malaysia
• Cyber Security Insights & Sharing
• FIDE Forum – Current Issues in Corporate Governance
• Islamic Banking in the 4th Industry Revolution,
• FIDE Forum – Securities Commission Dialogue: Compliance, Digital Innovation, Profitability and the
Leveraging Technology for Growth Way Forward – Insider & Global Perspectives

• FIDE Forum – 1st Distinguished Board Leadership Series: • Digital Transformation and Impact to Businesses
Navigating the VUCA world
• Malaysian Financial Reporting Standards 17 (MFRS17)
• FIDE FORUM – 5th Annual Dialogue with the Governor of Insurance Contracts
BNM
• KPMG – Digitalization/transformation of operations and
• FIDE Forum – 5th Annual Dialogue with the Deputy sales channels with sharing of case studies for KPMG’s
Governor of BNM other clients

• FIDE Forum – Cryptocurrency and Blockchain Technology • KPMG – The Guangdong-HongKong-Macao Greater Bay
Area
• FIDE Forum – Win the innovation race: Unlocking the
creative power of Asians • Briefing on Proposed Changes Code on Corporate
Governance
• BNM – Industry Seminar on Recovery and Resolution
Planning in Malaysia • Update on Singapore Stock Exchange Regulations

• BNM – Value-Based Intermediation Dialogue • Briefing on Singapore Corporate Access (CorpPass) – a
new corporate digital identity to transact online with
• BNM, International Monetary Fund (“IMF”) & IMF Government agencies
Economic Review – Summer Conference: Globalisation
in the Aftermath of the Crisis • Briefing on Guide on prevention of Insider Trading –
Handling of Confidential Information and Dealings in
• KPMG – MCCG Update Securities

• KPMG – Cyber Security Awareness • Update on Amendments to the Building Maintenance
and Strata Management Act.

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CORPORATE GOVERNANCE OVERVIEW,
RISK MANAGEMENT & INTERNAL CONTROL statement

F. STRENGTHENING CORPORATE GOVERNANCE PRINCIPLE 4: CONFIDENTIALITY
CULTURE
The Group is committed to providing a safe, reliable and
Hong Leong Bank Group Code of Conduct & Ethics secured banking experience for our customers.

A fundamental value of the Group is that we are ‘Here PRINCIPLE 5: OBJECTIVITY
for the Long Term’. In upholding this value, the Group
commits to a high standard of professionalism and ethics Employees must not allow any conflict of interest, bias or
in the conduct of our business and professional activities as undue influence of others to override their business and
set out in this Code of Conduct & Ethics (“Code”). professional judgment. Employees must not be influenced
by friendships or association in performing their role.
The Code is applicable to: Decisions must be made on a strictly arms-length business
basis.
• All employees who work in the Group across the
jurisdictions in which we operate – including but PRINCIPLE 6: ENVIRONMENT
not limited to permanent, part-time and temporary
employees; The Group is committed to reduce the effect of our
operations on the environment so that we are able to build
• Any other persons permitted to perform duties or our franchise in a safe and healthy environment. We aim
functions within the Group – including but not limited to do this by managing the resources we use across the
to vendors, service providers, contractors, secondees, Group and raising staff awareness about the importance
interns, industrial attachment and agency staff. of caring for the environment. The Group will be mindful
of its activities with employees, business partners and the
As the Code forms part of the terms and conditions of community we operate within to ensure human rights are
employment, our employees are required to adhere to a safeguarded. Where there are adverse impacts, we are
high standard of professionalism and ethics in the conduct committed to addressing these.
of their business and professional activities.
Whistleblowing Policy
Principles
A Whistleblowing Policy has also been established by the
There are six key pillars to the Group’s Code of Conduct & Bank and it provides a structured channel for all employees
Ethics: of the Bank and any other persons providing services to,
or having a business relationship with the Bank, to report
PRINCIPLE 1: COMPETENCE any concerns about any improper conducts, wrongful
acts or malpractice committed within the Bank. The
The Group is committed to ensuring that its employees Whistleblowing Policy is published on the Bank’s Website.
develop and maintain the relevant knowledge, skills and
behaviours to ensure that our activities are conducted Other Policies and Codes of the Group
professionally and proficiently.
For good governance, the Group has various other policies
PRINCIPLE 2: INTEGRITY such as Group Compliance Policy, Group Financial Crime
Compliance Policy, Code of Conduct For Wholesale Financial
The Group’s Vision, Mission and Values identifies a strong Markets, Group Whistleblowing Policy, Group IT Security
values-based culture to guide decisions, actions and Policy, Privacy Policy, Group Media and Public Relations
interactions with stakeholders as a key enabler for the Policy and Procurement Policy.
success of our business.
Continuous Training & Awareness
PRINCIPLE 3: FAIRNESS
Multiple training channels, such as mandatory e-Learning
A core mission of the Group is to help our clients succeed programmes, are in place to enable easy access for
through simple, relevant, personal and fair banking. We employees to be upskilled. Attestation to the Code is
must act responsibly and be fair and transparent in our conducted on an annual basis.
business practices, including treating our colleagues,
customers and business partners with respect. We must
consider the impact of our decisions and actions on all
stakeholders.

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CORPORATE GOVERNANCE OVERVIEW,
RISK MANAGEMENT & INTERNAL CONTROL statement

G. ACCOUNTABILITY AND AUDIT During the financial year under review, the external
auditors met with the BAC to:
The Bank has put in place a framework of processes
whereby Board committees provide oversight on critical • present the scope of the audit before the
processes of the Bank’s reporting of financial statements, commencement of audit; and
in order to ensure that accountability and audit are integral
components of the said processes. • review the results of the audit as well as the
management letter after the conclusion of the
I. Financial Reporting audit.

The Board has a fiduciary responsibility to ensure The external auditors meet with the BAC members at least
the proper maintenance of accounting records of the twice a year without the presence of Executive Directors
Group. The Board receives the recommendation to and management.
adopt the financial statements from the BAC, which
assesses the integrity of financial statements with H. DISCLOSURE
the assistance of the external auditors.
The Bank has in place a Corporate Disclosure Policy for
II. Risk Management and Internal Control compliance with the disclosure requirements set out in
the MMLR, and to raise awareness and provide guidance
The Board has overall responsibility for maintaining to the Board and management on the Group’s disclosure
a system of internal controls which covers financial requirements and practices.
and operational controls and risk management.
This system provides reasonable but not absolute All timely disclosure and material information documents
assurance against material misstatements, losses will be posted on the Bank’s Website after release to Bursa.
and fraud.
I. SHAREHOLDERS
The BRMC is delegated with the responsibility to
provide oversight on the Bank’s management of I. Dialogue between Companies and Investors
critical risks that the Group faces while the BAC is
delegated with the responsibility to review the The Board acknowledges the importance of regular
effectiveness of internal controls implemented in communication with shareholders and investors
the Bank. via the annual reports, circulars to shareholders
and quarterly financial reports and the various
The Statement on Risk Management and Internal announcements made during the year, through
Control as detailed under Section J of this Statement which shareholders and investors can have an
provides an overview of the system of internal overview of the Group’s performance and operation.
controls and risk management framework of the
Group. Notices of general meetings and the accompanying
explanatory notes are provided within the prescribed
III. Relationship with Auditors notice period on the Bank’s Website, Bursa’s website,
in the media and by post to shareholders. This allows
The appointment of external auditors is recommended shareholders to make the necessary arrangements
by the BAC, which determines the remuneration of to attend and participate in general meetings either
the external auditors. The BAC reviews the suitability in person, by corporate representative, by proxy or
and independence of the external auditors annually. by attorney.
In this regard, an annual assessment is conducted by
the BAC to evaluate the performance, independence The Bank has a website at www.hlb.com.my which
and objectivity of the external auditors prior to the shareholders can access for information which
making any recommendation to the Board on the includes the Board Charter, TORs of Board Committees,
reappointment of the external auditors. corporate information, announcements/press
releases/briefings, financial information, products
The Bank also has a Policy on the Use of External information and investor relations. A summary of
Auditors for Non-Audit Services to govern the the key matters discussed at the AGM is published
professional relationship with the external auditors on the Bank’s Website.
in relation to non-audit services. Assessment will
be conducted by the BAC for non-audit services The Board has identified Ms Lim Lean See, the
to ensure that the provision of non-audit services Chairman of the BAC, as the Independent Non-
does not interfere with the exercise of independent Executive Director of the Board to whom concerns
judgment of the external auditors. may be conveyed, and who would bring the same
to the attention of the Board.

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CORPORATE GOVERNANCE OVERVIEW,
RISK MANAGEMENT & INTERNAL CONTROL statement

I. SHAREHOLDERS is designed to manage rather than to eliminate
the risk of failure in the achievement of goals and
I. Dialogue between Companies and Investors objectives of the Group, and therefore only provide
(continued) reasonable assurance and not absolute assurance,
against material misstatement or loss.
In addition, shareholders and investors can have
a channel of communication with the following The system of risk management and internal control
persons to direct queries and provide feedback to instituted throughout the Group is updated from
the Group: time to time to align with the dynamic changes in
the business environment as well as any process
GENERAL MANAGER, COMMUNICATION & CSR improvement initiatives undertaken. The Board
confirms that its Management team responsibly
Tel No. : 03-2081 8888 ext. 61916 implements the Board policies, procedures and
guidelines on risk management and internal control.
Fax No. : 03-2081 7801
III. Risk Management and Internal Control Framework
e-mail address : [email protected]
The organisational structure of the Group clearly
CHIEF FINANCIAL OFFICER defines the lines of accountability and responsibility.
Risk assessment and evaluation is an integral
Tel No. : 03-2081 8888 part of the Group’s strategic planning cycle and
are responsive to business environment and
Fax No. : 03-2081 8924 opportunities. Management committees are
appropriately set up to ensure proper utilisation
e-mail address : [email protected] and investment of the Group’s assets for effective
risk return rewards or to limit losses. The Group
II. AGM Risk Management (“GRM”) and GC divisions have
implemented an enterprise-wide integrated risk
The AGM provides an opportunity for the management framework to inculcate continuous
shareholders to seek and clarify any issues and risk and regulatory compliance awareness,
to have a better understanding of the Group’s understanding of procedures and controls and thus,
performance. Shareholders are encouraged to meet improve the overall control environment.
and communicate with the Board at the AGM and
to vote on all resolutions. Senior management and Operationally, the Group operates multiple lines of
the external auditors are also available to respond to defenses to effect a robust control framework. At the
shareholders’ queries during the AGM. All Directors first level, the operating business and support units
and the GMD/CEO attended the last AGM held on 23 are responsible for the day-to-day management
October 2017. of risks inherent in the various business activities.
Regulatory and operational compliance units
Pursuant to Paragraph 8.29A(1) of the MMLR, all are set up in the various lines of business and
resolutions tabled at general meetings will be put support departments. They oversee the day-to-
to a vote by way of a poll and the voting results will day compliance to all regulatory requirements,
be announced at the meetings and through Bursa. business and process controls. At the second level,
GRM is responsible for setting the risk management
J. STATEMENT ON RISK MANAGEMENT AND INTERNAL framework and developing tools and methodologies
CONTROL for the identification, measurement, monitoring,
control and pricing of risks whereas GC is responsible
I. Introduction for ensuring that controls to manage compliance
risks are adequate and operating as intended. At the
The Board recognises that practice of good governance third level, the Internal Audit function complements
is an important process and has established the BAC GRM and GC by monitoring and evaluating
and BRMC to ensure maintenance of a sound system significant exposures to risk and contributing to the
of internal controls and good risk management improvement of the risk management and control
practices. The processes for risks and controls systems. It also provides an independent perspective
assessments and improvements are on-going and and assessment on the adequacy and effectiveness
are regularly reviewed in accordance with the of the risk management framework governance
guidelines on the ‘Statement on Risk Management systems and processes, including those instituted by
and Internal Control: Guidelines for Directors of the compliance function.
Listed Issuers’.
The above is depicted in the following diagram:
II. Board Responsibilities

The Board acknowledges its overall responsibility
for the risk management and internal control
environment and its effectiveness in safeguarding
shareholders’ interests and the Group’s assets. The
risk management and internal control framework

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CORPORATE GOVERNANCE OVERVIEW,
RISK MANAGEMENT & INTERNAL CONTROL statement

J. STATEMENT ON RISK MANAGEMENT AND INTERNAL CONTROL (contineud)
III. Risk Management and Internal Control Framework (continued)

FIRST LINE OF DEFENCE SECOND LINE OF DEFENCE THIRD LINE OF DEFENCE
Business and Support Group Internal Audit
Regulatory and Operational Group Risk Management
Manages inherent risks and ensures Group Compliance Independent assessment of
compliance in day-to-day activities. effectiveness and enforcement of
Sets policies, reviews portfolio frameworks and policies.
risks and provides oversight of the
management of risk and compliance.

a) Risk Management

Managing risks is an integral part of the Group’s overall business strategy. It involves a process of identifying,
assessing and managing risks and uncertainties that could inhibit the Group’s ability to achieve its strategy and
strategic objectives.

Risk governance oversight is underpinned by the core pillars of risk culture, appetite, policies, surveillance, escalation
and capacity. Above all, the approaches need to be relevant, forward looking and sustainable.

The Group’s risk management framework structure incorporates the components depicted in the diagram below:

RISK Governance Oversight

Board and management to exercise oversight and set tone from the top.

Culture Defined risk Clear Rigorous robust Functional
of risk appetite framework, risk escalation capabilities
ownership policies and structure
surveillance and
process Cultivation of capacity
proactive risk
pillars Risk Clear articulation Provide clear Facilities early communication The right
management of the Board’s direction. identification talent pool and
Critical is part of the risk tolerance Defined of emerging to support infrastructure
components to in pursuit of timely and
day-to-day its business business rules risks and informed are key to
put in place job of all objectives, and operating opportunities. decisions. effectively
employees, ensuring parameters. carry out risk
driven through business Gives clarity surveillance
strategies are activities.
daily aligned. to various
application of parties’
management accountabilities.

decisions.

approach relevant
Focus on things that matter.
How we
implement Forward looking
Be proactive. Anticipate emerging risks and opportunities.

Sustainable
Strive to build for the long term.

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J. STATEMENT ON RISK MANAGEMENT AND INTERNAL CONTROL (continued)

III. Risk Management and Internal Control Framework (continued)

a) Risk Management (continued)

In addition, the Risk Management Framework is effected through an organisational construct and escalation
structure as depicted below:

RISK management framework

Top down Board of Directors
Effective stewardship and control

Set Risk Appetite Board Risk Management Committee Monitoring and
& Tolerance Limit Reporting

Present single view of risks and to ensure adequate policies and Bottom up
controls within the Group
Set Policies and
Capital Allocation Group Risk Management & Group Compliance

Credit Risk Market Risk Operational Risk Liquidity Risk IT & Cyber Risk Regulatory
Compliance

Daily management of risk, limits, policies, procedures and reports

Business Divisions Distribution & Service Credit Management Operations & Shared
Channels Functions Service Functions

The Board has the overall responsibility to ensure there is proper oversight of the management of risks in the Group.
The Board sets the risk appetite and tolerance level and allocates the Group’s capital that is consistent with the
Group’s overall business objectives and desired risk profile. GRM monitors and reports the Group’s Credit, Market,
Liquidity, Operational and IT Risks. GC identifies, assesses, monitors and reports compliance issues in addition to
advising, providing guidance and training on regulatory requirements. These risks are presented to the BRMC
regularly.

The BRMC deliberates and evaluates the reports prepared by GRM and GC on the adequacy and effectiveness of
the controls to mitigate the Group’s risks and provides updates to the Board, and where appropriate, make the
necessary recommendations to the Board.

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RISK MANAGEMENT & INTERNAL CONTROL statement

J. STATEMENT ON RISK MANAGEMENT AND INTERNAL CONTROL (continued)
III. Risk Management and Internal Control Framework (continued)
a) Risk Management (continued)

HONG LEONG BANKING GROUP’S KEY RISKS

CREDIT RISK OPERATIONAL RISK
Credit Risk is the risk of loss if a borrower or
counterparty in a transaction fails to meet its Operational Risk is the risk of loss resulting from
obligations. inadequate or failed internal processes, people and
systems or from external events which also include
MARKET RISK outsourcing and business continuity risks.
Market Risk is the risk of loss in financial
instruments or the balance sheet due to adverse LIQUIDITY RISK
movements in market factors such as interest and
exchange rates, prices, spreads, volatilities, and/ Liquidity Risk is the risk of loss resulting from the
or correlations. unavailability of sufficient funds to fulfill financial
commitments, including customers’ liquidity needs, as
REGULATORY COMPLIANCE RISK they fall due. Liquidity Risk also includes the risk of not
Regulatory Compliance Risk is the risk of legal or being able to liquidate assets in a timely manner.
regulatory sanctions, material financial loss or loss
to reputation as a result of failure to comply with IT & CYBER RISK
laws and regulations.
Information Technology Risk is the risk of technological
failure which may disrupt business operations such as
system defects or service outages. This also includes
cyber security risk, which is the risk of possible threat
that might exploit a vulnerability to breach system
security and therefore cause possible harm.

b) Basel II and III requirements, the Group has provided the
disclosures under a separate Pillar 3 section in
The Group places great importance on Basel this Annual Report.
II and III and views Basel II and III as a bank-
wide initiative that will ensure that the Group For Basel III, the Group has put in place plans
continues to meet international best practices to continuously strengthen its capital and
for the Group’s credit, market, operational liquidity positions well ahead of the Basel
and liquidity risk management practices. By Committee’s time schedule and in advance
adopting Basel II and III, the Group is able anticipation of any local jurisdiction guidelines
and will continue to enhance and embed in all the countries that the Bank operates in.
sound risk management practices within the
Group and be equipped with the right risk c) Internal Audit
management discipline, practices, processes
and systems. The Bank’s Group Internal Audit Division
(“GIAD”) performs the internal auditing
For Basel II Pillar 1, the Group is in function for the various entities in the
compliance with the regulatory standards financial services group. GIAD regularly
and is progressively employing advance risk reviews the critical operations (as defined in
measurement in the respective businesses. For BNM Guidelines on Internal Audit Function of
Basel II Pillar 2, the Group has established an Licensed Institutions) and critical controls in
Internal Capital Adequacy Assessment Process the Information Technology environment (as
framework that forms an integrated approach outlined in BNM GPIS) of the Group to ensure
to manage the Group’s risk, capital and that the internal controls are in place and
business strategy. For Basel II Pillar 3, which working effectively.
is related to market discipline and disclosure

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RISK MANAGEMENT & INTERNAL CONTROL statement

J. STATEMENT ON RISK MANAGEMENT AND INTERNAL IV. Assessment of Risk Management and Internal
CONTROL (continued) Control System

III. Risk Management and Internal Control The Board has received assurances from the GMD/
Framework (continued) CEO, chief financial officer, chief risk officer, chief
internal auditor and chief compliance officer that
c) Internal Audit (continued) the Group’s risk management and internal control
system are operating adequately and effectively.
The results of the audits conducted by GIAD
are reported to the BAC. Follow-up actions and Based on the assurances it has received from
the review of the status of corrective action Management, the Board is of the view that the
plans are carried out by Management via the Group’s risk management and internal control
Risk and Compliance Governance Committee system are operating adequately and effectively for
(“RCGC”) chaired by the GMD/CEO, whose the financial year under review and up to the date of
members comprise senior management. The approval of this report.
minutes of meetings of RCGC are tabled to the
BRMC and BAC for notation. V. Review of the Statement by External Auditors

Implementation of corrective action plans are As required by Paragraph 15.23 of the Bursa Malaysia
followed up on a monthly basis and reported Securities Berhad Main Market Listing Requirements,
to the BAC. Highlights of the BAC meetings are the external auditors have reviewed this Statement
submitted to the Board for review and further on Risk Management and Internal Control. Their
deliberation. limited assurance review was performed in
accordance with Audit and Assurance Practice Guide
In addition, internal controls are also effected (“AAPG”) 3 issued by the Malaysian Institute of
through the following processes: Accountants. AAPG 3 does not require the external
auditors to form an opinion on the adequacy and
• The Board receives and reviews regular effectiveness of the risk management and internal
reports from Management on the key control systems of the Group.
operating statistics, business dynamics,
legal matters and regulatory issues that K. DIRECTORS’ RESPONSIBILITY IN FINANCIAL
would have implications on internal control REPORTING
measures.
The MMLR requires the Directors to prepare financial
• The BAC regularly reviews and holds statements for each financial year which give a true and
discussions with Management on the fair view of the state of affairs of the Group and of the
actions taken on internal control issues Bank as at the end of the financial year and of its financial
identified in reports prepared by GIAD, results and cash flows of the Group and of the Bank for the
external auditors and regulatory authorities. financial year.

• Policies on delegation and authority limits The Directors are satisfied that in preparing the financial
are strictly implemented to ensure a statements of the Group and of the Bank for the FYE 2018,
culture that respects integrity and honesty, the Group has used the appropriate accounting policies
and thereby reinforce internal controls. and applied them consistently. The Directors are also of
the view that relevant approved accounting standards
• Policies and procedures are set out in have been followed in the preparation of these financial
operation manuals and disseminated statements.
throughout the organisation in support of
a learning culture, so as to reinforce an This Statement on Corporate Governance Overview, Risk
environment of internal controls discipline. Management and Internal Control is made in accordance
with the resolution of the Board.
• Policies for recruitment, promotion and
termination of staff are in place to ensure
the Group’s human resources comply with
internal controls.

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Directors’ report

for the financial year ended 30 June 2018

The Directors have pleasure in presenting their report together with the audited financial statements of the Group and of the Bank
for the financial year ended 30 June 2018.

PRINCIPAL ACTIVITIES

The Bank is principally engaged in all aspects of commercial banking business and in the provision of related services. The principal
activity of the significant subsidiary consists of Islamic Banking services. Other subsidiary companies are primarily engaged in property
investment and management, investment holding and nominee services. The details of the subsidiary companies are disclosed in
Note 13 to the financial statements.

Business strategy for the current financial year

The Malaysian economy is expected to grow moderately in 2018, riding on continued expansion in the world economy. Domestic
demand will continue to play an integral role in supporting economic growth as the external environment may turn more challenging
in the wake of the shift in US trade policies that has invited retaliation from its trading partners. Private consumption is expected
to benefit from various government measures to reduce the cost of living including the zero-setting of GST and reintroduction
of targeted petrol subsidy, cushioning the impact from postponement and review of numerous higher-priced projects that will
adversely impact investment and the construction sector. That said, steady and sound financial markets as well as a still healthy
banking system will enable the Malaysian economy to weather any undesirable shocks.

Against a backdrop of moderate economic expansion, business activities and loan demand are expected to remain supported while
more upbeat consumer sentiments shall continue to ensure further expansion in household lending. Brick and mortar business aside,
the Bank will continue to focus on broadening and deepening our digital strategy to transform and optimize our business to enhance
customer experience and deliver operational excellence. We will continue to grow our domestic franchise and regional business
through our Community Banking approach and differentiate ourselves via our multi-channel banking services to cater to the evolving
needs of the customers.

Outlook and business plan for new financial year

The world economy is expected to maintain a steady growth pace in 2019, underpinned by moderate growth among advanced
economies and faster expansion in the emerging economies, albeit the expectation of challenges from geopolitical uncertainties and
shift in US trade policies.

In tandem with the world economy, the Malaysian economy is expected to stay on a steady growth path in 2019, driven by
sustained domestic demand. A steady labour market, continuous wage growth and improving consumer sentiments arising from
policy changes, coupled with fiscal reforms, are expected to provide the much needed support to private consumption and overall
economic growth which will help alleviate the short term setback in investment.

Being digital at the core, executing our digital strategy remains our key priority in strengthening our digital offerings and transforming
our products and services. We will continue to grow our domestic franchise and regional businesses by entrenching ourselves in the
communities leveraging on our branch footprint and digital capabilities. We strive to continue to lead the digital and innovation space
to provide best-in-class experience and engage with our customers through reimagined customer journeys.

Performance review and management reports

The Board receives and reviews regular reports from the Management on key financial and operating statistics as well as legal and
regulatory matters. The performance of each business unit is assessed against the approved budgets and business objectives whilst
explanation is provided for significant variances.

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Directors’ report

for the financial year ended 30 June 2018

Credit information rating

On 2 November 2017, Rating Agency Malaysia Berhad has upgraded the Bank’s long-term rating to AAA and reaffirmed its short-term
rating at P1, with a positive outlook.

The ratings indicate that in the long-term, the Bank is adjudged to offer high safety for timely payment of financial obligations while
in the short-term, the Bank is adjudged to have superior capacities for timely payment of obligations.

Details of the rating of the Bank and its debt securities are as follows:

Rating Agency Date Accorded Rating Classification

Rating Agency 2-Nov-17 Long-Term Rating: AAA
Short-Term Rating: P1
Malaysia Berhad



Subordinated Notes: AA1

Tier 1 Capital Securities: AA2

Moody’s Investors 17-Jan-18 Long-Term Rating: A3
Short-Term Rating: P2
Services Ltd



Fitch Ratings Ltd 6-Aug-18 Long-Term Rating: A-
Short-Term Rating: F2


Financial results

The Group The Bank
RM’000 RM’000

Profit before taxation 3,246,255 2,517,932
Taxation (608,177) (545,521)

Net profit for the financial year 2,638,078 1,972,411

Dividends

Since the last financial year ended 30 June 2017, a final single tier dividend of 30.0 sen per share amounting to RM613,680,013 in
respect of the financial year ended 30 June 2017, was paid on 15 November 2017.

An interim single tier dividend for the financial year ended 30 June 2018 of 16.0 sen per share amounting to RM327,332,805 was
paid on 28 March 2018.

The Directors now propose a final single tier dividend of 32.0 sen per share on the Bank’s adjusted total number of issued shares
(excluding 81,101,700 treasury shares held pursuant to Section 127 of the Companies Act 2016 and Executive Share Scheme of
40,786,550 shares) amounting to RM654,665,611 for the financial year ended 30 June 2018.

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Directors’ report

for the financial year ended 30 June 2018

Significant events during the financial year

Significant events during the financial year are disclosed in Note 51 to the financial statements.

Subsequent events after the financial year
There are no material subsequent events after the financial year that require disclosure or adjustments to the financial statements.

Issue of shares and debentures
There were no new ordinary shares or debentures issued during the financial year.

Reserves and provisions

There were no material transfers to or from reserves or provisions during the financial year other than those disclosed in the financial
statements.

Directors

The Directors who have held office during the financial year and during the period from the end of the financial year to the date of
this report are:

YBhg Tan Sri Quek Leng Chan (Chairman, Non-Executive Non-Independent)
Mr Tan Kong Khoon (Non-Independent Executive Director)
Mr Kwek Leng Hai (Non-Independent Non-Executive Director)
Ms Lim Lean See (Independent Non-Executive Director)
Ms Chok Kwee Bee (Independent Non-Executive Director)
YBhg Dato’ Nicholas John Lough @ Sharif Lough bin Abdullah (Independent Non-Executive Director)
YBhg Datuk Dr Md Hamzah bin Md Kassim (Independent Non-Executive Director)
YBhg Datuk Wira Azhar bin Abdul Hamid (Independent Non-Executive Director)
(Retired on 14 May 2018)

The names of Directors of subsidiaries are set out in the respective subsidiary’s statutory accounts and the said information is deemed
incorporated herein by such reference and made a part hereof.

Directors’ remuneration
Details of Directors’ remuneration are set out in Note 37 to the financial statements.

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for the financial year ended 30 June 2018

Directors’ interests

According to the Register of Directors’ Shareholdings kept by the Bank under Section 59 of the Companies Act 2016, the Directors
holding office at the end of the financial year who had beneficial interests in the ordinary shares and/or preference shares and/or
loan stocks and/or options over ordinary shares of the Bank and/or its related corporations during the financial year are as follows:

Directors’ direct interests
Number of ordinary shares/preference shares/ordinary shares issued or to be issued or acquired
arising from the exercise of options*/conversion of redeemable convertible unsecured loan stocks**/
nominal value in Ringgit Malaysia of Additional Tier 1 capital securities/perpetual subordinated
sukuk wakalah***

Nominal

value per As at As at

share 01.07.2017 Acquired Sold 30.06.2018

RM (unless indicated)

Interests of YBhg Tan Sri Quek Leng Chan in:

Hong Leong Company (Malaysia) Berhad (1) 390,000 – – 390,000

Hong Leong Financial Group Berhad (1) 5,438,664 – – 5,438,664

Guoco Group Limited USD0.50 1,056,325 – – 1,056,325

GuocoLand Limited (2) 13,333,333 – – 13,333,333

GuocoLand (Malaysia) Berhad (1) 19,506,780 – – 19,506,780

GL Limited USD0.20 735,000 – – 735,000

The Rank Group Plc GBP138/9p 285,207 – – 285,207

Interests of Tan Kong Khoon in: – 8,000,000* – 8,000,000*
Hong Leong Financial Group Berhad

Interests of Mr Kwek Leng Hai in: (1) 420,500 – – 420,500
Hong Leong Company (Malaysia) Berhad (1) 190,000 – – 190,000
Hong Leong Industries Berhad (1) 2,526,000 – – 2,526,000
Hong Leong Financial Group Berhad (1) 5,510,000 – – 5,510,000
Hong Leong Bank Berhad (1) 205,200 – – 205,200
Hume Industries Berhad USD0.50 3,800,775 – – 3,800,775
Guoco Group Limited (2) 35,290,914 – – 35,290,914
GuocoLand Limited (6) 2,300,000 – – 2,300,000
Lam Soon (Hong Kong) Limited (1) 226,800 – – 226,800
GuocoLand (Malaysia) Berhad (1) 71,250 – – 71,250
Malaysian Pacific Industries Berhad GBP138/9p 1,026,209 – – 1,026,209
The Rank Group Plc

Interests of YBhg Dato’ Nicholas John Lough @

Sharif Lough bin Abdullah in:

Hong Leong Financial Group Berhad (1) – 10,000 – 10,000
– 250,000*** – 250,000***

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Directors’ report

for the financial year ended 30 June 2018

Directors’ interests (continued)

Directors’ deemed interests
Number of ordinary shares/preference shares/ordinary shares issued or to be issued or acquired
arising from the exercise of options*/conversion of redeemable convertible unsecured loan stocks**/
nominal value in Ringgit Malaysia of Additional Tier 1 capital securities/perpetual subordinated
sukuk wakalah***

Nominal

value per As at As at

share 01.07.2017 Acquired Sold 30.06.2018

RM (unless indicated)

Interests of YBhg Tan Sri Quek Leng Chan in:

Hong Leong Company (Malaysia) Berhad (1) 7,701,455(7) – (50,000)(12) 7,651,455(7)

Hong Leong Financial Group Berhad (1) 896,158,726(7) – – 896,158,726(7)

Hong Leong Capital Berhad (1) 200,805,058 – – 200,805,058

Hong Leong Bank Berhad (1) 1,346,237,169 – – 1,346,237,169

– 400,000,000*** – 400,000,000***

Hong Leong MSIG Takaful Berhad (1) 65,000,000 – – 65,000,000

Hong Leong Assurance Berhad (1) 140,000,000 – – 140,000,000

Hong Leong Islamic Bank Berhad – 400,000,000*** – 400,000,000***

Hong Leong Industries Berhad (1) 243,415,670(7) 200,000(7)(11) (915,200)(7) 242,700,470(7)

200,000*(7) – (200,000)*(7) –

Hong Leong Yamaha Motor Sdn Bhd (1) 17,352,872 – – 17,352,872

Guocera Tile Industries (Meru) Sdn Bhd (1) 19,600,000 – – 19,600,000

Century Touch Sdn Bhd (1) 6,545,001 – – 6,545,001

(In members’ voluntary liquidation)

Varinet Sdn Bhd (1) 10,560,627 – – 10,560,627

(In members’voluntary liquidation)

Malaysian Pacific Industries Berhad (1) 108,950,757 – (235,500) 108,715,257
5,640,607 – – 5,640,607
Carter Resources Sdn Bhd (1) – –
84,000,000 – – 84,000,000
Carsem (M) Sdn Bhd (1) 22,400(8) – – 22,400(8)
– –
(1) 350,231,658(7) – – 350,231,658(7)
100,000*(7) 35,000(7)(11) – 100,000*(7)
Hume Industries Berhad (1) –
237,124,930 – (35,000)*(7) 237,124,930
817,911,030 – – 817,946,030(7)
1,591,200 –
Guoco Group Limited USD0.50 420,000*(7) – – 385,000*(7)
292,169,709 54,400,000 – 292,169,709
GuocoLand Limited (2) 140,076,337** – – 140,076,337**
123,372,953 – – 124,964,153
189,600,000 – 189,600,000

Southern Steel Berhad (1) 8,000,000 62,400,000
24,000,000 24,000,000
(1)
7(9) 7(10)
Southern Pipe Industry (Malaysia) Sdn Bhd (1)

TPC Commercial Pte. Ltd. (2)

TPC Hotel Pte. Ltd. (2)

Wallich Residence Pte. Ltd. (2)

GLL A Pte. Ltd. (2)

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for the financial year ended 30 June 2018

Directors’ interests (continued)

Directors’ deemed interests
Number of ordinary shares/preference shares/ordinary shares issued or to be issued or acquired
arising from the exercise of options*/conversion of redeemable convertible unsecured loan stocks**/
nominal value in Ringgit Malaysia of Additional Tier 1 capital securities/perpetual subordinated
sukuk wakalah***

Nominal

value per As at As at

share 01.07.2017 Acquired Sold 30.06.2018

RM (unless indicated)

Interests of YBhg Tan Sri Quek Leng Chan in

(continued):

GLL Chengdu Pte Ltd (2) 149,597,307 – – 149,597,307
– – 128,800,000(10)
GLL Prosper Pte Ltd (2) 128,800,000(9) – – 22,400,000(10)
– – 150,000,000
GLL Thrive Pte Ltd (2) 22,400,000(9) – – 3,150,000,000

Beijing Ming Hua Property Co., Ltd (3) 150,000,000

Shanghai Xinhaojia Property (3) 3,150,000,000

Development Co., Ltd

Shanghai Xinhaozhong Holding Co., Ltd (3) 19,600,000 – (19,110,000) 490,000

(formerly known as Shanghai Xinhaozhong

Property Development Co., Ltd)

JB Parade Sdn Bhd (1) 28,000,000 – – 28,000,000
28,796,000(8) – 97,390,000(8)
(1) 68,594,000(8) – 140,008,659
– – 6,570,000
Lam Soon (Hong Kong) Limited (6) 140,008,659 – – 455,574,796
– – 277,000,000
Guangzhou Lam Soon Food Products Limited (5) 6,570,000 – – 34,408,000
– – 123,502,605(8)
GuocoLand (Malaysia) Berhad (1) 455,574,796 –
– 925,753,134
Guoman Hotel & Resort Holdings Sdn Bhd (1) 277,000,000 – – 100,000*(7)
– – 219,282,221
GLM Emerald Industrial Park (Jasin) Sdn Bhd (1) 34,408,000 –

(formerly known as Continental (1) 123,502,605(8)

Estates Sdn Bhd)

GL Limited USD0.20 925,753,134

100,000*(7)

The Rank Group Plc GBP138/9p 219,282,221

Interests of YBhg Dato’ Nicholas John Lough @ (1) – 10,000 – 10,000
Sharif Lough bin Abdullah in:

Hong Leong Financial Group Berhad

Notes:
(1) Concept of par value was abolished with effect from 31 January 2017 pursuant to the Companies Act, 2016
(2) Concept of par value was abolished with effect from 30 January 2006 pursuant to the Singapore Companies (Amendment) Act, 2005
(3) Capital contribution in RMB
(4) Capital contribution in USD
(5) Capital contribution in HKD
(6) Concept of par value was abolished with effect from 3 March 2014 pursuant to the New Companies Ordinance (Chapter 622), Hong Kong
(7) Inclusive of interest pursuant to Section 59(11)(c) of the Companies Act, 2016 in shares held by family member
(8) Redeemable Preference Shares
(9) A wholly owned subsidiary
(10) Became a non-wholly owned subsidiary during the financial year
(11) Exercise of share options
(12) Cancellation pursuant to reduction of share capital

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Directors’ report

for the financial year ended 30 June 2018

Directors’ benefits

Since the end of the previous financial year, no Director of the Bank received or became entitled to receive any benefit (other than a
benefit included in the aggregate amount of emoluments received or due and receivable by the Directors as shown in the financial
statements or as fixed salary of a full-time employee of the Bank or of related corporations) by reason of a contract made by the
Bank or its related corporations with the Director or with a firm of which the Director is a member, or with a company in which the
Director has a substantial financial interest except for:

YBhg Tan Sri Quek Leng Chan, who may be deemed to derive a benefit by virtue of those transactions, contracts and agreements
for the acquisitions and/or disposal of stocks and shares, stocks-in-trade, products, parts, accessories, plants, chattels, fixtures,
buildings, land and other properties or any interest in any properties; and/or for the provision of services including but not
limited to project and sales management and any other management and consultancy services; and/or for construction,
development, leases, tenancy, licensing, dealership and distributorship; and/or for the provision of treasury functions, advances
in the conduct of normal trading, banking, insurance, investment, stockbroking and/or other businesses between the Bank or
its related corporations and corporations in which YBhg Tan Sri Quek Leng Chan is deemed to have interests.

Neither at the end of the financial year, nor at any time during the financial year, did there subsist any other arrangements to which
the Bank is a party, with the object or objects of enabling the Directors of the Bank to acquire benefits by means of the acquisition
of shares in, or debentures of, the Bank or any other body corporate, other than the share options granted pursuant to the Executive
Share Scheme.

Responsibility Statement by the Board of Directors

In the course of preparing the annual financial statements of the Group and of the Bank, the Directors are collectively responsible in
ensuring that these financial statements are drawn up in accordance with the Malaysian Financial Reporting Standards, International
Financial Reporting Standards and the requirements of the Companies Act 2016 in Malaysia.

It is the responsibility of the Directors to ensure that the financial reporting of the Group and the Bank present a true and fair view of
the state of affairs of the Group and the Bank as at 30 June 2018 and of the financial results and cash flows of the Group and of the
Bank for the financial year ended 30 June 2018.

The financial statements are prepared on the going concern basis and the Directors have ensured that proper accounting records are
kept, applied the appropriate accounting policies on a consistent basis and made accounting estimates that are reasonable and fair
so as to enable the preparation of the financial statements of the Group and of the Bank with reasonable accuracy.

Executive Share Scheme

The Bank has established and implemented an Executive Share Scheme (“ESS”).

The ESS of up to ten percent (10%) of the total number of issued shares (excluding treasury shares) of the Bank comprises the
Executive Share Option Scheme (“ESOS”) and the Executive Share Grant Scheme (“ESGS”).

(i) ESOS

The ESOS which was approved by the shareholders of the Bank on 25 October 2012, was established on 12 March 2013 and
would be in force for a period of ten (10) years.

On 18 September 2012, the Bank announced that Bursa Malaysia Securities Berhad had resolved to approve the listing of new
ordinary shares of the Bank to be issued pursuant to the exercise of options under the ESOS.

The ESOS would provide an opportunity for eligible executives who had contributed to the growth and development of the HLB
Group to participate in the equity of the Bank.

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for the financial year ended 30 June 2018

Executive Share Scheme (continued)

(ii) ESGS

The ESGS which was approved by the shareholders of the Bank on 23 October 2013, was established on 28 February 2014 and
would end on 11 March 2023.

On 10 September 2013, the Bank announced that Bursa Malaysia Securities Berhad had resolved to approve the listing of new
ordinary shares of the Bank to be issued pursuant to the ESGS.

The ESGS would provide the Bank with the flexibility to reward the eligible executives of the HLB Group for their contribution
with awards of the Bank’s shares without any consideration payable by the eligible executives.

At any point of time during the existence of the ESS, the aggregate number of shares comprised in the options and grants under the
ESS established by the Bank which are still subsisting shall not exceed 10% of the total number of issued shares (excluding treasury
shares) of the Bank at any one time (“Schemes Aggregate Maximum Allocation”).

(i) ESOS

There were 37,550,000 options granted at an exercise price of RM14.24 under the ESOS 2013/2023 of the Bank on 2 April
2015.

Arising from the completion of the Bank’s Rights Issue on 28 December 2015, the exercise price for the share options granted
on 2 April 2015 under the ESOS was adjusted from RM14.24 to RM13.77 and additional share options of 782,657 were allotted
to the option holders, in accordance with the provisions of the bye-laws governing the ESOS.

Tha Bank had granted 22,750,000 options at an exercise price of RM16.46 under the ESOS of the Bank during the financial year
ended 30 June 2018.

As at the financial year ended 30 June 2018, a total of 31,458,394 share options lapsed arising from the resignation of some
option holders.

As at 30 June 2018, a total of 61,082,657 options had been granted under the ESOS, out of which 29,624,263 options (adjusted
following the completion of the Bank’s Rights Issue) remain outstanding. No options were exercised during the financial
year ended 30 June 2018. The aggregate options granted to Directors and chief executives of the HLB Group under the ESOS
amounted to 19,326,399, out of which 8,258,488 options remain outstanding.

Since the commencement of the ESOS, the maximum allocation applicable to Directors and senior management of the HLB
Group is 50% of the Schemes Aggregate Maximum Allocation.

As at 30 June 2018, the actual percentage of options granted to Directors and senior management of the HLB Group under
the ESOS was 2.32% of the total number of issued shares (excluding treasury shares) of the Bank and the actual percentage
granted to the directors and senior management of the HLB Group during the financial year ended 30 June 2018 was 0.91% of
the total number of issued shares (excluding treasury shares) of the Bank.

(ii) ESGS

The Bank had granted 322,580 ordinary shares under the ESGS amounting to 0.02% of the total number of issued shares
(excluding treasury shares) of the Bank to the chief executive of the Bank during the financial year ended 30 June 2018.

As at 30 June 2018, a total of 1,019,526 ordinary shares had been granted under the ESGS amounting to 0.05% of the total
number of issued shares (excluding treasury shares) to the chief executive of the Bank, out of which 376,350 ordinary shares
had been vested, with 643,176 ordinary shares remain outstanding.

Save for the above, there were no other shares granted under the ESGS.

A trust has been set up for the ESS and it is administered by an appointed trustee. This trustee will be entitled from time to time
to accept financial assistance from the Bank upon such terms and conditions as the Bank and the trustee may agree to purchase
the Bank’s shares from the open market for the purposes of this trust. In accordance with MFRS 132, the shares purchased for the
benefit of the ESS holdings are recorded as “Treasury Shares for ESS”, in addition to the Treasury Shares for share buy-back, in the
Shareholders’ Equity on the statements of financial position.

For further details on the ESS, refer to Note 53 to the financial statements on Equity Compensation Benefits.

126

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2018
HONG LEONG BANK BERHAD

Directors’ report

for the financial year ended 30 June 2018

Statutory information regarding the Group and the Bank

(I) As at the end of the financial year

(a) Before the financial statements of the Group and the Bank were prepared, the Directors took reasonable steps:

(i) to ascertain that proper action had been taken in relation to the writing off of bad debts and financing and the
making of allowance for doubtful debts and financing and had satisfied themselves that all known bad debts and
financing had been written off and that adequate allowance had been made for doubtful debts and financing; and

(ii) to ensure that any current assets, which were unlikely to be realised in the ordinary course of business including
the values of current assets as shown in the accounting records of the Group and of the Bank had been written
down to an amount which the current assets might be expected so to realise.

(b) In the opinion of the Directors, the results of the operations of the Group and the Bank during the financial year had not
been substantially affected by any item, transaction or event of a material and unusual nature.

(II) From the end of the financial year to the date of this report

(a) The Directors are not aware of any circumstances:

(i) which would render the amount written off for bad debts and financing or the amount of the allowance for
doubtful debts and financing in the financial statements of the Group and the Bank, inadequate to any substantial
extent;

(ii) which would render the values attributed to current assets in the financial statements of the Group and the Bank
misleading; and

(iii) which had arisen which would render adherence to the existing method of valuation of assets or liabilities of the
Group and the Bank misleading or inappropriate.

(b) In the opinion of the Directors:

(i) the results of the operations of the Group and the Bank for the financial year ended 30 June 2018 are not likely to
be substantially affected by any item, transaction or event of a material and unusual nature which had arisen in
the interval between the end of the financial year and the date of this report; and

(ii) no contingent or other liability has become enforceable, or is likely to become enforceable, within the period of
twelve months after the end of the financial year which will or may affect the ability of the Group and the Bank to
meet their obligations as and when they fall due.

(III) As at the date of this report

(a) There are no charges on the assets of the Group and the Bank which had arisen since the end of the financial year to
secure the liabilities of any other person.

(b) There are no contingent liabilities which had arisen since the end of the financial year.

(c) The Directors are not aware of any circumstances not otherwise dealt with in the report or financial statements of the
Group and the Bank which would render any amount stated in the financial statements misleading.

127

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FINANCIALS

Directors’ report

for the financial year ended 30 June 2018

Disclosure of Shariah Committee
The Group’s Islamic banking activity is subject to the Shariah compliance and confirmation by the Shariah Committee consisting of 5
scholars, at all times, appointed by the Board of Directors of Hong Leong Islamic Bank Berhad and approved by BNM.

The primary role of the Shariah Committee is mainly advising on matters relating to the business operations and products of the Group
and providing support by attending regular meetings with the Group to ensure that they are in conformity with Shariah principles.

Holding and ultimate holding companies
The holding and ultimate holding companies are Hong Leong Financial Group Berhad and Hong Leong Company (Malaysia) Berhad
respectively. Both companies are incorporated in Malaysia.

Subsidiaries
Details of subsidiaries are set out in Note 13 to the financial statements.

Auditors’ remuneration
Details of auditors’ remuneration are set out in Note 34 to the financial statements.

Auditors
The auditors, PricewaterhouseCoopers PLT (LLP0014401-LCA & AF 1146), have expressed their willingness to continue in office.

PricewaterhouseCoopers PLT (LLP0014401-LCA & AF 1146) was registered on 2 January 2018 and with effect from that date
PricewaterhouseCoopers (AF1146), a conventional partnership was converted to a limited liability partnership.

This report was approved by the Board of Directors on 19 September 2018. Signed on behalf of the Board of Directors:

Tan Kong Khoon

Lim Lean See

Kuala Lumpur
19 September 2018

128

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2018

HONG LEONG BANK BERHAD

Statements of Financial Position

as at 30 June 2018

The Group The Bank

Note 2018 2017 2018 2017

RM’000 RM’000 RM’000 RM’000

Assets

Cash and short-term funds 3 6,472,405 10,823,310 5,550,388 10,199,194

Deposits and placements with banks

and other financial institutions 4 2,796,480 826,743 2,705,522 393,664
– 300,880 – 300,880
Securities purchased under resale agreements 5,688,165 5,405,310
5,969,872 27,654,217 5,619,035 24,886,280
Financial assets held-for-trading 5 31,862,936 13,060,604 29,018,580 10,408,793
14,436,945 123,990,941 10,906,565 102,538,550
Financial investments available-for-sale 6 128,059,105 1,407,731 104,274,903 1,309,339
953,042 947,583
Financial investments held-to-maturity 7 780,069 686,696
918,067 – 932,926 13,484
Loans, advances and financing 8 3,738,230 43,563 2,986,547
– 3,453,017 1,662,409
Other assets 9 4,312,482 – 2,157,132
169,185 76,711
Derivative financial instruments 10 – 3,466,891 76,711 946,525
179,426 1,423,097 946,525 774,999
Amount due from subsidiaries 11 3,651,091 213,323 782,853 194,870
1,414,975 1,831,312 137,166 1,771,547
Statutory deposits with Central Banks 12 152,541 1,771,547
1,831,312 4,851 –
Subsidiary companies 13 53,067 47,908
195,552,522 164,816,685
Investment in joint venture 14 202,890,773 169,111,037

Investment in associated companies 15

Property and equipment 16

Intangible assets 17

Goodwill 18

Deferred tax assets 19

Total assets

Liabilities

Deposits from customers 20 157,414,095 155,233,205 129,583,425 129,859,403

Deposits and placements of banks

and other financial institutions 21 7,237,434 5,486,692 7,245,854 5,460,076

Obligations on securities sold

under repurchase agreements 3,831,869 2,829,617 3,805,119 2,801,366
544,451 364,675 506,971 348,841
Bills and acceptances payable
4,719,446 4,052,667 3,932,169 3,475,689
Other liabilities 22 1,020,196 1,405,652 983,680 1,363,654

Derivative financial instruments 10

Recourse obligation on loans sold to

Cagamas Berhad 23 202,952 202,926 202,952 202,926
2,902,908 2,402,145 2,502,278 2,001,642
Tier 2 subordinated bonds 24
401,192 – 401,192 –
Multi-currency Additional Tier 1 capital securities 25 512,352 515,623 512,352 515,623
211,619 201,713 171,958 173,953
Innovative Tier 1 capital securities 26 172,194 171,131
– –
Provision for taxation 172,867,109 146,374,304
178,998,514 149,847,950
Deferred tax liabilities 19

Total liabilities

Equity 27 7,739,063 7,739,063 7,739,063 7,739,063
Share capital 28 16,885,463 15,680,311 12,256,291 11,437,279
Reserves 29
Less: Treasury shares (732,267) (733,961) (732,267) (733,961)

Total equity 23,892,259 22,685,413 19,263,087 18,442,381

Total equity and liabilities 202,890,773 195,552,522 169,111,037 164,816,685

Commitments and contingencies 42 167,840,081 163,004,495 162,664,431 156,405,399

The accompanying notes form an integral part of the financial statements

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FINANCIALS

Statements of Income

for the financial year ended 30 June 2018

The Group The Bank

Note 2018 2017 2018 2017

RM’000 RM’000 RM’000 RM’000

Interest income 30 6,357,559 6,163,134 6,269,327 6,072,889
Interest expense 31 (3,464,439) (3,308,727) (3,428,214) (3,271,875)

Net interest income 2,893,120 2,854,407 2,841,113 2,801,014
646,064 550,099 – –
Income from Islamic Banking business 32
3,539,184 3,404,506 2,841,113 2,801,014
1,300,381 1,146,143 1,499,585 1,390,282

Non-interest income 33 4,839,565 4,550,649 4,340,698 4,191,296
(2,060,449) (2,007,523) (1,797,248) (1,736,002)
Net income
2,779,116 2,543,126 2,543,450 2,455,294
Overhead expenses 34

Operating profit before allowances

Allowance for impairment losses

on loans, advances and financing 35 (76,651) (161,159) (32,649) (109,273)

Write back of impairment losses on

financial investments 7,131 2,222 7,131 1,106

2,709,596 2,384,189 2,517,932 2,347,127
516,111 342,910 – –
Share of results of associated company 15 20,548 21,153 – –

Share of results of joint venture 14 3,246,255 2,748,252 2,517,932 2,347,127
(608,177) (603,236) (545,521) (603,076)
Profit before taxation
2,638,078 2,145,016 1,972,411 1,744,051
Taxation 38

Net profit for the financial year

Attributable to: 2,638,078 2,145,016 1,972,411 1,744,051
Owners of the parent

Earnings per share for profit attributable 39 129.0 104.9 96.4 85.3
to owners of the parent (sen): 128.7 104.8 96.3 85.2
- basic

- diluted 39

The accompanying notes form an integral part of the financial statements

130

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REPORT
2018

HONG LEONG BANK BERHAD

Statements of Comprehensive Income

for the financial year ended 30 June 2018

The Group The Bank

Note 2018 2017 2018 2017

Net profit for the financial year RM’000 RM’000 RM’000 RM’000

2,638,078 2,145,016 1,972,411 1,744,051

Other comprehensive (loss)/income:

Items that may be reclassified subsequently to

profit or loss:

Share of other comprehensive loss of

associated company (822) (14,501) – –
(325,017) 226,877 (57,408) 44,456
Currency translation differences
(348,012) 50,990 (333,392) 67,005
Net fair value changes on financial investments 2,398 856 2,398 856

available-for-sale 40 170,034 (12,585) 166,510 (16,333)

Net fair value changes in cash flow hedge 40

Income tax relating to components of other

comprehensive income/(loss) 40

Other comprehensive (loss)/income for the (501,419) 251,637 (221,892) 95,984
financial year, net of tax

Total comprehensive income for the financial year 2,136,659 2,396,653 1,750,519 1,840,035

Attributable to: 2,136,659 2,396,653 1,750,519 1,840,035
Owners of the parent

The accompanying notes form an integral part of the financial statements

131

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FINANCIALS

Statements of Changes in Equity

for the financial year ended 30 June 2018

Attributable to owners of the parent

Share Treasury Regulatory Other Retained
capital profits
RM’000 shares* reserves^ reserves Total
7,739,063 RM’000 RM’000
The Group Note RM’000 RM’000 RM’000
– 22,685,413
At 1 July 2017 – (733,961) 678,483 1,441,246 13,560,582

Comprehensive income –
–
Net profit for the financial year – – – – 2,638,078 2,638,078
–
Share of other comprehensive

loss of associates – – (822) – (822)

Net fair value changes

in financial investments

available-for-sale 40 – – (177,480) – (177,480)

Net fair value changes

in cash flow hedge 40 – – 1,900 – 1,900

Currency translation

differences – – (325,017) – (325,017)

Total comprehensive (loss)/income – – (501,419) 2,638,078 2,136,659

Transactions with owners

Transfer to regulatory reserve – – 74,456 – (74,456) –

Dividends paid:

- final dividend for the

financial year ended

30 June 2017 41 – – – – (613,680) (613,680)

- interim dividend for the

financial year ended

30 June 2018 41 – – – – (327,333) (327,333)
– 1,694
ESS exercised – (3,036) 1,342 –

Option charge arising

from ESS granted – – – 11,200 – 11,200

Total transactions with owners – 1,694 74,456 8,164 (1,014,127) (929,813)

At 30 June 2018 7,739,063 (732,267) 752,939 947,991 15,184,533 23,892,259

* Treasury shares consist of two categories which are detailed in Note 29
^ Comprise regulatory reserves maintained by the Group’s banking subsidiaries of RM741,694,000 (30 June 2017: RM667,238,000) in accordance

with BNM’s Policy Document on Classification and Impairment Provisions for Loans/Financing and the banking subsidiary in Vietnam with the State
Bank of Vietnam of RM11,245,000 (30 June 2017: RM11,245,000)

The accompanying notes form an integral part of the financial statements

132

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REPORT
2018

HONG LEONG BANK BERHAD

Statements of Changes in Equity

for the financial year ended 30 June 2018

Attributable to owners of the parent
Treasury Statutory Regulatory Other
Share Share shares* reserve reserves ^ reserves Retained
capital premium RM’000 RM’000 RM’000 RM’000 profits
RM’000 Total
RM’000 RM’000 RM’000
The Group Note

At 1 July 2016 2,167,718 5,571,345 (735,040) 3,920,716 598,772 1,181,271 8,412,365 21,117,147

Comprehensive income

Net profit for the financial year – – – – – – 2,145,016 2,145,016
– –
Share of other comprehensive
– –
loss of associates – – – – – (14,501) – (14,501)
– –
Net fair value changes in – –

financial investments

available-for-sale 40 – – – 38,611 – 38,611

Net fair value changes

in cash flow hedge 40 – – – 650 – 650

Currency translation

differences – – – 226,877 – 226,877

Total comprehensive income – – – 251,637 2,145,016 2,396,653

Transactions with owners

Transfer to retained profits – – – (3,920,716) – – 3,920,716 –
– – – – 79,711 – (79,711) –
Transfer to regulatory reserve
– –
Dividends paid:
– –
- final dividend for the
5,571,345 (5,571,345)
financial year ended - -
– –
30 June 2016 41 – – – – (531,818) (531,818)
5,571,345 (5,571,345)
- interim dividend for the

financial year ended

30 June 2017 41 – – – – (306,840) (306,840)

Transition to no par value

regime under the

Companies Act 2016 ** 28(b) – – – – – –
1,079 – – (1,933) 854 –
ESS exercised
– 10,271
Option charge arising 79,711 (828,387)

from ESS granted – – 10,271 –
1,079 (3,920,716)
Total transactions with owners 8,338 3,003,201

At 30 June 2017 7,739,063 – (733,961) – 678,483 1,441,246 13,560,582 22,685,413

* Treasury shares consist of two categories which are detailed in Note 29
** The New Companies Act 2016 (“New Act”), which came into operation on 31 January 2017, abolished the concept of authorised share capital and

par value of share capital. Consequently, any amount standing to the credit of the share premium account of RM 5,571,345,000 becomes part of
the Group’s share capital pursuant to the transitional provisions set out in Section 618(2) of the New Act. There is no impact on the numbers of
ordinary shares in issue or the relative entitlement of any of the members as a result of this transition.
^ Comprise regulatory reserves maintained by the Group’s banking subsidiaries of RM667,238,000 (30 June 2016: RM587,527,000) in accordance
with BNM’s Policy Document on Classification and Impairment Provisions for Loans/Financing and the banking subsidiary in Vietnam with the State
Bank of Vietnam of RM11,245,000 (30 June 2016: RM11,245,000)

The accompanying notes form an integral part of the financial statements

133

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FINANCIALS

Statements of Changes in Equity

for the financial year ended 30 June 2018

Non-distributable Distributable
Retained
Share Treasury Regulatory Other profits
capital RM’000
RM’000 shares* reserve reserves Total
7,739,063 10,245,205 RM’000
The Bank Note RM’000 RM’000 RM’000
– 18,442,381
At 1 July 2017 (733,961) 571,678 620,396
–
Comprehensive income –
–
Net profit for the financial year – – – – 1,972,411 1,972,411

Net fair value changes

in financial investments

available-for-sale 40 – – (166,384) – (166,384)

Net fair value changes

in cash flow hedge 40 – – 1,900 – 1,900

Currency translation

differences – – (57,408) – (57,408)

Total comprehensive (loss)/income – – (221,892) 1,972,411 1,750,519

Transactions with owners

Transfer to regulatory reserve – – 65,420 – (65,420) –

Dividends paid:

- final dividend for the

financial year ended

30 June 2017 41 – – – – (613,680) (613,680)

- interim dividend for the

financial year ended

30 June 2018 41 – – – – (327,333) (327,333)
– 1,694
ESS exercised – (3,036) 1,342 –

Option charge arising

from ESS granted – – - 11,200 – 11,200

Total transactions with owners – 1,694 65,420 8,164 (1,005,091) (929,813)

At 30 June 2018 7,739,063 (732,267) 637,098 406,668 11,212,525 19,263,087

* Treasury shares consist of two categories which are detailed in Note 29

The accompanying notes form an integral part of the financial statements

134

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REPORT
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HONG LEONG BANK BERHAD

Statements of Changes in Equity

for the financial year ended 30 June 2018

Non-distributable Distributable

Share Share Treasury Statutory Regulatory Other Retained
capital premium
RM’000 shares* reserve reserve reserves profits Total
RM’000 RM’000
The Bank Note RM’000 RM’000 RM’000 RM’000 RM’000

At 1 July 2016 2,167,718 5,571,345 (735,040) 3,380,604 495,008 516,074 6,035,024 17,430,733

Comprehensive income

Net profit for the financial year – – – – – – 1,744,051 1,744,051

Net fair value changes – – – – – 50,878 – 50,878
– – – – – 650 – 650
in financial investments – – – – – 44,456 – 44,456
– – – – – 95,984 1,744,051 1,840,035
available-for-sale 40

Net fair value changes

in cash flow hedge 40

Currency translation

differences

Total comprehensive income

Transactions with owners

Transfer to retained profits – – – (3,380,604) – – 3,380,604 –
– – – – 76,670 – (76,670) –
Transfer to regulatory
– –
reserve
– –
Dividends paid:
5,571,345 (5,571,345)
- final dividend for the – –
– –
financial year ended
5,571,345 (5,571,345)
30 June 2016 41 – – – – (531,818) (531,818)

- interim dividend for

the financial year

ended 30 June 2017 41 – – – – (306,840) (306,840)

Transition to no-par value

regime under the

Companies Act 2016 ** – – – – –
1,079 – – (1,933) 854
ESS exercised –
–
Option charge arising 76,670

from ESS granted – – 10,271 – 10,271
1,079 (3,380,604) 8,338 2,466,130 (828,387)
Total transactions with owners

At 30 June 2017 7,739,063 – (733,961) – 571,678 620,396 10,245,205 18,442,381

* Treasury shares consist of two categories which are detailed in Note 29
** The New Act, which came into operation on 31 January 2017, abolished the concept of authorised share capital and par value of share capital.

Consequently, any amount standing to the credit of the share premium account of RM 5,571,345,000 becomes part of the Bank’s share capital
pursuant to the transitional provisions set out in Section 618(2) of the New Act. There is no impact on the numbers of ordinary shares in issue or
the relative entitlement of any of the members as a result of this transition.

The accompanying notes form an integral part of the financial statements

135

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FINANCIALS

Statements of Cash Flows

for the financial year ended 30 June 2018

The Group The Bank

2018 2017 2018 2017

Cash flows from operating activities RM’000 RM’000 RM’000 RM’000
Profit before taxation
Adjustments for: 3,246,255 2,748,252 2,517,932 2,347,127
Depreciation of property and equipment
Amortisation of intangible assets 120,812 91,477 102,085 84,925
Net gain on disposal of property and equipment 71,841 74,469 67,719 70,504
Net loss on disposal of intangible assets (2,274) (1,048) (2,283) (1,050)
Share of associated company’s results 7 7
Share of joint venture’s results – – –
Property and equipment written off (516,111) (342,910) – –
Intangible assets written off (20,548) 4,568 –
Amortisation of upfront fees (21,153) 8 528
Gain from sale/redemption of security portfolio: 4,879 823 1,545 23
- financial investments held-to-maturity 21 57 3,921
- financial investments available-for-sale (7)
- financial assets held-for-trading and derivatives 1,619 4,047 (196,818) (37)
Allowances for impairment losses on loans, (39,087) (59,768)
(7) (37) (38,941)
advances and financing (197,037) (60,377) 223,215
Impaired loans and financing written off (39,087) (38,941) 15,992 325,846
Net unrealised gain on revaluation 19,114
307,779 399,293
of securities held at fair value through 19,719 22,508
profit or loss and derivatives
Net realised loss on fair value (106,569) (68,535) (106,569) (68,535)
changes arising from fair value hedges
and amortisation of fair value changes 800 115 800 115
arising from terminated fair value hedges 26,800 – – –
Net loss on dilution of investment in associated company 3 3
Net loss arising from fair value hedges 152 152
Unrealised loss on foreign exchange – 113,400 – 113,400
Write back of impairment losses on financial investments (2,222) (1,106)
Interest income on Multi-currency Additional Tier 1 (7,131) (7,131)
capital securities – –
Interest expense on senior bonds and – (11,975)
subordinated obligations 125,881 125,881
Interest expense on Multi-currency Additional Tier 1 92,268 92,268
capital securities – –
Interest expense on innovative Tier 1 capital securities 12,783 35,362 12,051 35,362
Interest expense on borrowings 38,205 38,205
Interest expense on recourse obligations 3,859 –
on loans sold to Cagamas – –
Interest income from: 6,727 6,727
- financial investments available-for-sale 7,602 7,602
- financial investments held-to-maturity (638,942) (634,351)
Dividend income from: (742,369) (354,968) (738,767) (352,683)
- financial investments available-for-sale (375,142) (370,398)
- associated company (259,157) (259,157)
- joint venture (281,087) – (281,087) (249,342)
- subsidiary companies – – (138,560)
Share option expenses – – (4,698)
– (4,882) -
Operating profit before working capital changes 10,271 (43,400)
11,200 11,200 10,271

1,675,380 1,848,254 1,154,385 1,474,079

136

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HONG LEONG BANK BERHAD

Statements of Cash Flows

for the financial year ended 30 June 2018

The Group The Bank

2018 2017 2018 2017

(Increase)/Decrease in operating assets RM’000 RM’000 RM’000 RM’000
Cash and short-term funds and deposits and
(4,044,396) (254,431) (3,958,708) 103,940
placements with banks and other financial 300,880 3,755,790 300,880 3,755,790
institutions with original maturity of more than (273,262) (372,642) (205,280) (284,740)
three months (4,954,752) (2,824,452)
Securities purchased under resale agreements (4,398,167) (1,978,065)
Financial assets held-for-trading 3,694 41,467 37,948 72,034
Loans, advances and financing 295,432 124,192
Derivative financial instruments 627,662 622,642
Other assets – – (30,079) 992
Amount due from subsidiaries 557,889 (466,470) 616,389
Statutory deposits with Central Banks (574,252)

Increase/(Decrease) in operating liabilities 2,350,935 6,829,012 (160,505) 3,700,184
Deposits from customers
Deposits and placements of banks 1,750,742 (714,538) 1,785,778 (353,557)
1,002,252 (665,286) 1,003,753 (693,537)
and other financial institutions
Securities sold under repurchase agreements 179,776 14,220 158,130 14,889
Bills and acceptances payable (385,456) (143,956) (379,974) (168,475)
Derivative financial instruments 675,749 148,599 464,575
Other liabilities (68,728)
(1,108,463) 6,385,058 (1,650,990)
Cash flows (used in)/generated from operations (660,026) (391,020) (571,611) 5,469,000
Taxation paid (322,256)

Net cash (used in)/generated from operating activities (1,768,489) 5,994,038 (2,222,601) 5,146,744

Cash flows from investing activities (3,617,252) (1,018,024) (3,530,034) (267,494)

Net purchases of financial (994,134) (934,109) (120,309) (50,633)
investments available-for-sale 1 – 1 –

Net purchases of financial (124,689) (158,127) (119,942) (147,335)
investments held-to-maturity 5,729 3,901 5,569 3,523
(9,681)
Proceeds from sale of intangible assets (11,337) (19,530) (18,613)
Purchase of property and equipment
Net proceeds from sale of property and equipment – – (389,824) –
Purchase of intangible assets – – (66) –
Investment in Additional Tier 1 perpetual – – (92,857) (132,649)

surbordinated sukuk wakalah – – 43,400 –
Investment in subordinated facilities 101,111 181,953 101,111 181,953
Investment in subsidiary company
Dividends received from: 3,563 3,428 3,563 3,428
- Subsidiary companies 281,087 259,157 281,087 259,157
- Associated company
- Joint venture (4,355,921) (1,681,351) (3,827,982) (168,663)
- Financial investments available-for-sale

Net cash used in investing activities

137

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FINANCIALS

Statements of Cash Flows

for the financial year ended 30 June 2018

The Group The Bank

Note 2018 2017 2018 2017

Cash flows from financing activities RM’000 RM’000 RM’000 RM’000
Dividends paid
Repayment of USD 300.0 million senior bonds (941,013) (838,658) (941,013) (838,658)
Proceeds from debt issuance: – (1,323,150) – (1,323,150)
- Tier 2 subordinated bonds
- Multi-currency Additional Tier 1 capital securities 500,000 – 500,000 –
- Recourse obligation on loans sold to Cagamas 400,000 – 400,000 –
Interest paid: 200,050 200,050
- Senior bonds and subordinated obligations – –
- Multi-currency Additional Tier 1 capital securities
- Innovative Tier 1 capital securities (91,947) (133,363) (92,000) (133,258)
- Recourse obligation on loans sold to Cagamas (10,984) – (10,252) -
Repayment of borrowings (38,431) (38,431)
(35,362) (35,362)
(7,576) (3,851) (7,576) (3,851)
– – –
(388,589)

Net cash used in financing activities (189,951) (2,522,923) (189,272) (2,134,229)

Net (decrease)/increase in cash and cash equivalents (6,314,361) 1,789,764 (6,239,855) 2,843,852
Effects of exchange rate changes (111,203) 74,543 (55,801) 43,650
Cash and cash equivalents at the beginning
10,388,873 8,524,566 9,578,350 6,690,848
of financial year
3,963,309 10,388,873 3,282,694 9,578,350
Cash and cash equivalents at the end
of financial year

Cash and cash equivalents comprise the following: 3 6,472,405 10,823,310 5,550,388 10,199,194
Cash and short-term funds 4
Deposits and placements with banks 2,796,480 826,743 2,705,522 393,664
9,268,885 11,650,053 8,255,910 10,592,858
and other financial institutions



Less: (5,305,576) (1,261,180) (4,973,216) (1,014,508)
Cash and short-term funds and deposits and 3,963,309 10,388,873 3,282,694 9,578,350

placements with banks and other financial
institutions with original maturity of more than
three months



The accompanying notes form an integral part of the financial statements

138

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REPORT
2018

HONG LEONG BANK BERHAD

Statements of Cash Flows

for the financial year ended 30 June 2018

An analysis of changes in liabilities arising from financing activities for the financial year ended 30 June 2018 is as follows:

Cash Changes Non-Cash Changes

Balance at the Repayments Balance at the
The Group
2018 beginning of the Proceeds from Accrued Amortisation/ Other end of the

financial year from issuance redemption Interest paid interest (accretion) non-cash* financial year

RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000

Recourse obligation 202,926 – – (7,576) 7,602 – – 202,952
on loans sold to 2,402,145 500,000 442 – 2,902,908
Cagamas Berhad – (91,947) 92,268
– 400,000
Tier 2 subordinated 515,623 – – (10,984) 12,783 (607) – 401,192
bonds
900,000 – (38,431) 38,205 1,784 (4,829) 512,352
Multi-currency – (148,938) 150,858 1,619 (4,829) 4,019,404
Additional Tier 1
capital securities

Innovative Tier 1
capital securities

3,120,694

Cash Changes Non-Cash Changes

Balance at the Repayments Balance at the
The Bank
2018 beginning of the Proceeds from Accrued Amortisation/ Other end of the

financial year from issuance redemption Interest paid interest (accretion) non-cash* financial year

RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000

Recourse obligation 202,926 – – (7,576) 7,602 – – 202,952
on loans sold to 2,001,642 500,000 368 – 2,502,278
Cagamas Berhad – (92,000) 92,268
– 400,000
Tier 2 subordinated 515,623 – – (10,252) 12,051 (607) – 401,192
bonds
900,000 – (38,431) 38,205 1,784 (4,829) 512,352
Multi-currency – (148,259) 150,126 1,545 (4,829) 3,618,774
Additional Tier 1
capital securities

Innovative Tier 1
capital securities

2,720,191

* Other non-cash item comprises changes in fair value adjustments on completion of business combination accounting as disclosed in Note 26.

139

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REPORT

2018

FINANCIALS

Notes to the financial statements

for the financial year ended 30 June 2018

The following accounting policies have been used consistently in dealing with items that are considered material in relation to the
financial statements.

1 BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS

The financial statements of the Group and of the Bank have been prepared in accordance with the Malaysian Financial Reporting
Standards (“MFRS”), International Financial Reporting Standards (“IFRS”) and the requirements of the Companies Act 2016, in
Malaysia.

The financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial
investments available-for-sale and financial assets/financial liabilities at fair value through profit or loss (including derivative
financial instruments).

The financial statements incorporate the activities relating to Islamic Banking which have been undertaken by the Group in
compliance with Shariah principles. Islamic Banking business refers generally to the acceptance of deposits and granting of
financing under the Shariah principles.

The preparation of financial statements in conformity with MFRS requires the use of certain critical accounting estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and expenses during the reported financial year. It also
requires Directors to exercise their judgment in the process of applying the Group and the Bank’s accounting policies. Although
these estimates and judgment are based on the Directors’ best knowledge of current events and actions, actual results may
differ.

The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to
the financial statements are disclosed in Note 54.

A Standards, amendments to published standards and interpretations that are effective and applicable to the
Group and the Bank

The Group has applied the following amendments for the first time for the financial year beginning on 1 July 2017:

* Amendments to MFRS 107 ‘Statement of Cash Flows – Disclosure Initiative’
* Amendments to MFRS 112 ‘Income Taxes – Recognition of Deferred Tax Assets for Unrealised Losses’
* Annual Improvements to MFRSs 2014 – 2016 Cycle: MFRS 12 ‘Disclosures of Interests in Other Entities’

The adoption of the Amendments to MFRS 107 has required additional disclosure of changes in liabilities arising from
financing activities. Other than that, the adoption of these amendments did not have any impact on the current period
or any prior period and is not likely to affect future periods.

B Standards, amendments to published standards and interpretations to existing standards that are applicable to
the Group and the Bank that have been issued but not yet effective

A number of new standards and amendments to standards and interpretations are effective for financial year beginning
after 1 July 2018 that are applicable to the Group and the Bank are as follows.

(i) Financial year beginning on/after 1 July 2018

* IC Interpretation 22 ‘Foreign Currency Transactions and Advance Consideration’ (effective from 1 January 2018)
applies when an entity recognises a non-monetary asset or non-monetary liability arising from the payment
or receipt of advance consideration. MFRS 121 requires an entity to use the exchange rate at the ‘date of the
transaction’ to record foreign currency transactions.

IC Interpretation 22 provides guidance how to determine ‘the date of transaction’ when a single payment/
receipt is made, as well as for situations where multiple payments/receipts are made.

The date of transaction is the date when the payment or receipt of advance consideration gives rise to the non-
monetary asset or non-monetary liability when the entity is no longer exposed to foreign exchange risk.

140

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REPORT
2018

HONG LEONG BANK BERHAD

Notes to the financial statements

for the financial year ended 30 June 2018

1 BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS (CONTINUED)

B Standards, amendments to published standards and interpretations to existing standards that are applicable to
the Group and the Bank that have been issued but not yet effective (continued)

(i) Financial year beginning on/after 1 July 2018 (continued)

If there are multiple payments or receipts in advance, the entity should determine the date of the transaction for
each payment or receipt.

An entity has the option to apply IC Interpretation 22 retrospectively or prospectively.

* MFRS 9 ‘Financial Instruments’ (effective from 1 January 2018) will replace MFRS 139 “Financial Instruments:
Recognition and Measurement”.

Classification and measurements

MFRS 9 retains but simplifies the mixed measurement model in MFRS 139 and establishes three primary
measurement categories for financial assets: amortised cost, fair value through profit or loss (“FVTPL”) and fair
value through other comprehensive income (“OCI”). The basis of classification depends on the entity’s business
model and the cash flow characteristics of the financial asset. Investments in equity instruments are always
measured at fair value through profit or loss with an irrevocable option at inception to present changes in fair
value in OCI (provided the instrument is not held for trading). A debt instrument is measured at amortised
cost only if the entity is holding it to collect contractual cash flows and the cash flows represent principal and
interest.

For liabilities, the standard retains most of the MFRS 139 requirements. These include amortised cost accounting
for most financial liabilities, with bifurcation of embedded derivatives. The main change is:

* For financial liabilities classified as FVTPL, the fair value changes due to own credit risk should be recognised
directly to OCI. There is no subsequent recycling to profit or loss.

The combined application of the entity’s business model and the cash flow characteristics of the financial assets
do not result in the significant change in the classification of financial asset when compared to the existing
classification of financial assets in the statement of financial position as at 30 June 2018.

However, the Group and the Bank have identified certain financial investments currently held at both held-to-
maturity and available-for-sale which fail the solely for the payment of principal and interest (“SPPI”) test to be
reclassified as fair value through profit or loss (“FVTPL”) accordingly on 1 July 2018.

Certain debt instruments which pass the SPPI test have been re-designated from held-to-maturity to fair value
through OCI; held for trading to fair value through OCI; and available-for-sale to amortised cost.

The Group and the Bank have classified and measured all equity instruments that are not held for trading at
FVTPL except for certain equity instruments which have been identified to elect, at inception, the irrevocable
option to present changes in fair value in OCI.

The Group and the Bank do not expect a significant impact arising from the changes in classification and
measurement of the financial assets.

There will be no significant changes to the Group’s and the Bank’s accounting for financial liabilities as it largely
retains the MFRS 139 requirements. All the financial liabilities, except for derivatives financial liabilities and
financial liabilities designated at FVTPL, will remain as amortised cost as there has not been significant change
in the requirements for financial liabilities under MFRS 9.

141

ANNUAL
REPORT

2018

FINANCIALS

Notes to the financial statements

for the financial year ended 30 June 2018

1 BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS (CONTINUED)

B Standards, amendments to published standards and interpretations to existing standards that are applicable to
the Group and the Bank that have been issued but not yet effective (continued)

(i) Financial year beginning on/after 1 July 2018 (continued)

* MFRS 9 ‘Financial Instruments’ (effective from 1 January 2018) will replace MFRS 139 “Financial Instruments:
Recognition and Measurement” (continued).

Impairment of financial assets

MFRS 9 introduces an expected credit loss model on impairment that replaces the incurred loss impairment
model used in MFRS 139. The expected credit loss model is forward-looking and eliminates the need for a trigger
event to have occurred before credit losses are recognised.

The new impairment model requires the recognition of impairment allowances based on expected credit losses
(“ECL”) rather than only incurred credit losses as is the case under MFRS 139. It applies to financial assets
classified at amortised cost, debt instruments measured at FVOCI, lease receivables, loan commitments, financial
guarantee contracts and other loan commitments.

Under MFRS 9, impairment will be measured on each reporting date according to a three-stage expected credit
loss impairment model:

* Stage 1 – from initial recognition of financial assets to the date on which the credit risk of the asset has
increased significantly relative to its initial recognition, a loss allowance is recognised equal to the credit losses
expected to result from defaults occurring over the next 12 months (12-month ECL).

* Stage 2 – following a significant increase in credit risk relative to the initial recognition of the financial assets, a
loss allowance is recognised equal to the credit losses expected over the remaining life of the asset (Lifetime
ECL).

* Stage 3 – When a financial asset is considered to be credit-impaired, a loss allowance equal to full lifetime
expected credit losses is to be recognised (Lifetime ECL).

As all financial assets within the scope of MFRS 9 impairment model will be assessed for at least 12-month ECL,
and the population of financial assets to which full lifetime ECL applies is larger than the population of impaired
loans for which there is objective evidence of impairment in accordance with MFRS 139, the total allowance for
credit losses is expected to increase under MFRS 9 relative to the allowance for credit losses under MFRS 139.

In addition, changes in the required credit loss allowance, including the impact of movements between Stage 1
(12-month ECL) and Stage 2 (lifetime ECL) and the application of forward looking information, will be recorded in
profit or loss, allowance for credit losses will be more volatile under MFRS 9.

The assessment of credit risk and the estimation of ECL are required to be unbiased, probability-weighted and
should incorporate all available information which is relevant to the assessment, including information about past
events, current conditions and reasonable and supportable forecasts of future events and economic conditions at
the reporting date. In addition, the estimation of ECL should also take into account the time value of money.

Hedge accounting

Under MFRS 9, the general hedge accounting requirements have been simplified for hedge effectiveness testing
and permit hedge accounting to be applied to a greater variety of hedging instruments and risks. The Group and
the Bank do not expect a significant impact arising from the changes in the hedge accounting requirements.

142

ANNUAL
REPORT
2018

HONG LEONG BANK BERHAD

Notes to the financial statements

for the financial year ended 30 June 2018

1 BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS (CONTINUED)

B Standards, amendments to published standards and interpretations to existing standards that are applicable to
the Group and the Bank that have been issued but not yet effective (continued)

(i) Financial year beginning on/after 1 July 2018 (continued)

* MFRS 9 ‘Financial Instruments’ (effective from 1 January 2018) will replace MFRS 139 “Financial Instruments:
Recognition and Measurement” (continued).

Disclosure

The new standard also introduces expanded disclosure requirements and changes in presentation. These are
expected to change the nature and extent of the Group and the Bank’s disclosures about its financial instruments
particularly in the year of the adoption of the new standard.

The Group and the Bank will apply the new rules retrospectively from 1 July 2018, with the practical expedients
permitted under the standard. Comparatives for 2018 will not be restated.

The Group and the Bank are still in the midst of finalising the financial impact in relation to the adoption of MFRS
9. Based on the preliminary assessments undertaken to-date, the Group and the Bank expect an increase in the
allowance for impairment on loans, advances and financing under the new impairment requirements, which will
result in a reduction in the Group’s and the Bank’s opening retained profits and overall capital positions as of 1
July 2018.

The Group and Bank are in finalisation stages of the MFRS 9 implementation with a view to ensure full compliance
of the standard.

* MFRS 15 ‘Revenue from contracts with customers’ (effective from 1 January 2018) replaces MFRS 118 ‘Revenue’
and MFRS 111 ‘Construction contracts’ and related interpretations.

The core principle in MFRS 15 is that an entity recognises revenue to depict the transfer of promised goods or
services to the customer in an amount that reflects the consideration to which the entity expects to be entitled
in exchange for those goods or services.

Revenue is recognised when a customer obtains control of goods or services, that is, when the customer has the
ability to direct the use of and obtain the benefits from the goods or services.

A new five-step process is applied before revenue can be recognised:
* Identify contracts with customers;
* Identify the separate performance obligations;
* Determine the transaction price of the contract;
* Allocate the transaction price to each of the separate performance obligations; and
* Recognise the revenue as each performance obligation is satisfied.

Key provisions of the new standard are as follows:

* Any bundled goods or services that are distinct must be separately recognised, and any discounts or rebates
on the contract price must generally be allocated to the separate elements.

* If the consideration varies (such as for incentives, rebates, performance fees, royalties, success of an outcome
etc.), minimum amounts of revenue must be recognised if they are not at significant risk of reversal.

* The point at which revenue is able to be recognised may shift: some revenue which is currently recognised at
a point in time at the end of a contract may have to be recognised over the contract term and vice versa.

* There are new specific rules on licenses, warranties, non-refundable upfront fees, and consignment
arrangements, to name a few.

143

ANNUAL
REPORT

2018

FINANCIALS

Notes to the financial statements

for the financial year ended 30 June 2018

1 BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS (CONTINUED)

B Standards, amendments to published standards and interpretations to existing standards that are applicable to
the Group and the Bank that have been issued but not yet effective (continued)

(i) Financial year beginning on/after 1 July 2018 (continued)

* MFRS 15 ‘Revenue from contracts with customers’ (effective from 1 January 2018) replaces MFRS 118 ‘Revenue’
and MFRS 111 ‘Construction contracts’ and related interpretations (continued).

* As with any new standard, there are also increased disclosures.

The Group and the Bank are in the process of finalising the financial implication arising from the adoption of this
new standard. Based on the preliminary assessment, the Bank expects no significant impact to the fees and other
income for the Group and the Bank.

(ii) Financial year beginning on/after 1 July 2019

* MFRS 16 ‘Leases’ (effective from 1 January 2019) supersedes MFRS 117 ‘Leases’ and the related interpretations.

Under MFRS 16, a lease is a contract (or part of a contract) that conveys the right to control the use of an identified
asset for a period of time in exchange for consideration.

MFRS 16 eliminates the classification of leases by the lessee as either finance leases (on balance sheet) or
operating leases (off balance sheet). MFRS 16 requires a lessee to recognise a “right-of-use” of the underlying
asset and a lease liability reflecting future lease payments for most leases.

The right-of-use asset is depreciated in accordance with the principle in MFRS 116 ‘Property, Plant and Equipment’
and the lease liability is accreted over time with interest expense recognised in the income statement.

For lessors, MFRS 16 retains most of the requirements in MFRS 117. Lessors continue to classify all leases as either
operating leases or finance leases and account for them differently.

* IC Interpretation 23 ‘Uncertainty over Income Tax Treatments’ (effective 1 January 2019) provides guidance on
how to recognise and measure deferred and current income tax assets and liabilities where there is uncertainty
over a tax treatment.

If an entity concludes that it is not probable that the tax treatment will be accepted by the tax authority, the
effect of the tax uncertainty should be included in the period when such determination is made. An entity shall
measure the effect of uncertainty using the method which best predicts the resolution of the uncertainty.

IC Interpretation 23 will be applied retrospectively.

* Amendments to MFRS 128 ‘Long-term Interests in Associates and Joint Ventures’ (effective from 1 January 2019)
clarify that an entity should apply MFRS 9 ‘Financial Instruments’ (including the impairment requirements)
to long-term interests in an associate or joint venture, which are in substance form part of the entity’s net
investment, for which settlement is neither planned nor likely to occur in the foreseeable future.

In addition, such long-term interest are subject to loss allocation and impairment requirements in MFRS 128.

The amendments shall be applied retrospectively.

* Amendments to MFRS 9 ‘Prepayment features with negative compensation’ (effective 1 January 2019) allow
companies to measure some prepayable financial assets with negative compensation at amortised cost. Negative
compensation arises where the contractual terms permit the borrower to prepay the instrument before its
contractual maturity, but the prepayment amount could be less than the unpaid amounts of principal and interest.
To qualify for amortised cost measurement, the negative compensation must be reasonable compensation for
early termination of the contract, and the asset must be held within a ‘held to collect’ business model.

The amendments will be applied retrospectively.

144

ANNUAL
REPORT
2018

HONG LEONG BANK BERHAD

Notes to the financial statements

for the financial year ended 30 June 2018

1 BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS (CONTINUED)

B Standards, amendments to published standards and interpretations to existing standards that are applicable to
the Group and the Bank that have been issued but not yet effective (continued)

(ii) Financial year beginning on/after 1 July 2019 (continued)

* Annual Improvements to MFRSs 2015 – 2017 Cycle:

* Amendments to MFRS 3 ‘Business Combinations’ (effective from 1 January 2019) clarify that when a party
obtains control of a business that is a joint operation, the acquirer should account the transaction as a business
combination achieved in stages. Accordingly it should remeasure its previously held interest in the joint
operation (rights to the assets and obligations for the liabilities) at fair value on the acquisition date.

* Amendments to MFRS 11 ‘Joint Arrangements’ (effective from 1 January 2019) clarify that when a party
obtains joint control of a business that is a joint operation, the party should not remeasure its previously held
interest in the joint operation.

* Amendments to MFRS 112 ‘Income Taxes’ (effective from 1 January 2019) clarify that where income tax
consequences of dividends on financial instruments classified as equity is recognised (either in profit or loss,
other comprehensive income or equity) depends on where the past transactions that generated distributable
profits were recognised. Accordingly, the tax consequences are recognised in profit or loss when an entity
determines payments on such instruments are distribution of profits (that is, dividends). Tax on dividend
should not be recognised in equity merely on the basis that it is related to a distribution to owners.

* Amendments to MFRS 123 ‘Borrowing Costs’ (effective from 1 January 2019) clarify that if a specific borrowing
remains outstanding after the related qualifying asset is ready for its intended use or sale, it becomes part of
general borrowings.

* Amendments to MFRS 119 ‘Plan amendment, curtailment or settlement’ (effective 1 January 2019) requires an
entity to use the updated actuarial assumptions from remeasurement of its net defined benefit liability or asset
arising from plan amendment, curtailment or settlement, to determine current service cost and net interest for
the remaining period after the change to the plan. The amendments will be applied prospectively.

None of the standards, amendments and interpretations that are effective for the respective financial years is expected
to have a significant effect on the financial statements of the Group and the Bank, except for MFRS 9.

145

ANNUAL
REPORT

2018

FINANCIALS

Notes to the financial statements

for the financial year ended 30 June 2018

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A Consolidation

(i) Subsidiaries

Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an
entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and
has the ability to affect those returns through its power to direct the relevant activities of the entity. Subsidiaries
are fully consolidated from the date on which control is transferred to the Group and are de-consolidated from the
date control ceases.

The consolidated financial statements include the financial statements of the Bank and all its subsidiaries made up
to the end of the financial year.

The Group applies the acquisition method to account for business combinations.

The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred,
the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. The
consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration
arrangement and fair value of any pre-existing equity interest in the subsidiary. Identifiable assets acquired and
liabilities and contingent liabilities assumed in a business combination are with limited exceptions, measured
initially at their fair values at the acquisition date. The Group recognises any non-controlling interest in the acquiree
on an acquisition-by-acquisition basis, either at fair value or at the non-controlling interest’s proportionate share
of the recognised amounts of acquiree’s identifiable net assets.

The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the
acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable
net assets acquired is recognised as goodwill. If the total of consideration transferred, non-controlling interest
recognised and previously held interest measured is less than the fair value of the net assets of the subsidiary
acquired in the case of a bargain purchase, the difference is recognised directly in the statements of income.

Acquisition-related costs are expensed as incurred.

If the business combination is achieved in stages, carrying value of the acquirer’s previously held equity interest
in the acquiree is remeasured to fair value at the acquisition date, any gains or losses from such re-measurement
are recognised in the statements of income.

Any contingent consideration to be transferred by the Group is recognised at fair value at the acquisition date.
Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is
recognised in accordance with MFRS 139 in the statements of income. Contingent consideration that is classified
as equity is not remeasured, and its subsequent settlement is accounted for within equity.

The Group applies predecessor accounting to account for business combinations under common control. Under
predecessor accounting, assets and liabilities acquired are not restated to their respective fair values. They are
recognised at the carrying amounts from the consolidated financial statements of the ultimate holding company
of the Group and adjusted to conform with the accounting policies adopted by the Group. The difference between
any consideration given and the aggregate carrying amounts of the assets and liabilities (as of the date of the
transaction) of the acquired entity is recognised as an adjustment to equity. No additional goodwill is recognised.

The acquirer only incorporates the acquired entity’s results and statements of financial position prospectively from
the date on which the business combination between entities under common control occurred. Consequently,
the consolidated financial statements do not reflect the results of the acquired entity for the period before the
transaction occurred. The corresponding amounts for the previous financial year are also not restated.

Predecessor accounting may lead to a difference between the cost of the transaction and the carrying value of the
net assets. The difference is recorded in retained profits.

Intercompany transactions, balances and unrealised gains on transactions between Group companies are
eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the
transfer assets. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with
the policies adopted by the Group.

146

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HONG LEONG BANK BERHAD

Notes to the financial statements

for the financial year ended 30 June 2018

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

A Consolidation (continued)

(ii) Changes in ownership interests in subsidiaries without change of control

Transactions with non-controlling interests that do not result in loss of control are accounted for as transactions
with equity owners of the Group. A change in ownership interest results in an adjustment between the carrying
amounts of the controlling and non-controlling interests to reflect their relative interests in the subsidiary. Any
difference between the amount of the adjustment to non-controlling interests and any consideration paid or
received is recognised in equity attributable to owners of the Group.

(iii) Disposal of subsidiaries

When the Group ceases to consolidate because of loss of control, any retained interest in the entity is re-measured
to its fair value at the date when control is lost, with the change in carrying amount recognised in profit or loss. The
fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an
associate, joint venture or financial asset. In addition, any amounts previously recognised in other comprehensive
income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or
liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to
profit or loss.

Gains and losses of the disposal of subsidiaries include the carrying amount of goodwill relating to the subsidiaries
sold.

(iv) Joint arrangements

A joint arrangement is an arrangement of which there is contractually agreed sharing of control by the Group
with one or more parties, where decisions about the relevant activities relating to the joint arrangement require
unanimous consent of the parties sharing control. The classification of a joint arrangement as a joint operation or a
joint venture depends upon the rights and obligations of the parties to the arrangement. A joint venture is a joint
arrangement whereby the joint venturers have rights to the net assets of the arrangement. A joint operation is a
joint arrangement whereby the joint operators have rights to the assets and obligations for the liabilities, relating
to the arrangement.

The Group’s interest in a joint venture is accounted for in the financial statements by the equity method of
accounting. Under the equity method of accounting, interests in joint ventures are initially recognised at cost and
adjusted thereafter to recognise the Group’s share of the post-acquisition profits or losses and the Group’s share
of movements in other comprehensive income of the joint venture in other comprehensive income. Dividends
received or receivable from a joint venture are recognised as a reduction in the carrying amount of the investment.
When the Group’s share of losses in a joint venture equals or exceeds its interests in the joint ventures (which
includes any long-term interests that, in substance, form part of the Group’s net investment in the joint ventures),
the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the
joint ventures.

The Group determines at each reporting date whether there is any objective evidence that the investment in the
joint venture is impaired. An impairment loss is recognised for the amount by which the carrying amount of the
joint venture exceeds its recoverable amount. The Group presents the impairment loss adjacent to ‘share of results
of joint venture’ in the income statement.

Unrealised gains on transactions between the Group and its joint ventures are eliminated to the extent of the
Group’s interest in the joint ventures. Unrealised losses are also eliminated unless the transaction provides
evidence of an impairment of the asset transferred. Accounting policies of the joint ventures have been changed
where necessary to ensure consistency with the policies adopted by the Group.

If the ownership interest in a joint venture is reduced but joint control is retained, only a proportionate share of the
amounts previously recognised in other comprehensive income is reclassified to profit or loss where appropriate.

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Notes to the financial statements

for the financial year ended 30 June 2018

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

A Consolidation (continued)

(v) Associated companies

Associates are all entities over which the Group has significant influence but not control or joint control, generally
accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are
accounted for using the equity method of accounting. Under the equity method, the investment in an associate is
initially recognised at cost, and adjusted thereafter to recognise the Group’s share of the post-acquisition profits
or losses of the associate in profit or loss, and the Group’s share of movements in other comprehensive income of
the associate in other comprehensive income. Dividends received or receivable from an associate are recognised
as a reduction in the carrying amount of the investment. When the Group’s share of losses in an associate equals
or exceeds its interests in the associate, including any long-term interests that, in substance, form part of the
Group’s net investment in the associate, the Group does not recognise further losses, unless it has incurred legal
or constructive obligations or made payments on behalf of the associate. The Group’s investment in associates
includes goodwill identified on acquisition.

The Group determines at each reporting date whether there is any objective evidence that the investment in
the associate is impaired. An impairment loss is recognised for the amount by which the carrying amount of the
associate exceeds its recoverable amount. The Group presents the impairment loss adjacent to ‘share of results of
associated company’ in the income statement.

Profits and losses resulting from upstream and downstream transactions between the Group and its associate
are recognised in the Group’s financial statements only to the extent of unrelated investor’s interests in the
associates. Unrealised losses are eliminated unless the transaction provides evidence of an impairment of the asset
transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the
policies adopted by the Group.

If the ownership interest in an associate is reduced but significant influence is retained, only a proportionate
share of the amounts previously recognised in other comprehensive income is reclassified to profit or loss where
appropriate.

Dilution gains and losses arising in investments in associates are recognised in the statements of income.

(vi) Loss of significant influence or joint control

When the Group ceases to equity account its joint venture or associate because of a loss of joint control or significant
influence, any retained interest in the entity is remeasured to its fair value with the change in carrying amount
recognised in profit or loss. This fair value becomes the initial carrying amount for the purposes of subsequently
accounting for the retained interest as a financial asset. In addition, any amount previously recognised in other
comprehensive income in respect of the entity is accounted for as if the Group had directly disposed of the
related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are
reclassified to profit or loss.

(vii) Investments in subsidiaries, joint venture and associated companies

In the Bank’s separate financial statements, investments in subsidiaries, joint venture and associated companies
are carried at cost less any accumulated impairment losses. On disposal of investments in subsidiaries, joint venture
and associated companies, the difference between disposal proceeds and the carrying amount of investments are
recognised in the statements of income.

The amounts due from subsidiaries of which the Bank does not expect repayment in foreseeable future are
considered as part of the Bank’s investment in subsidiaries.

148

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2018

HONG LEONG BANK BERHAD

Notes to the financial statements

for the financial year ended 30 June 2018

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

B Recognition of interest/profit income and interest/profit expense

Interest and financing income and expense for all interest/profit-bearing financial instruments are recognised within
‘interest income’ and ‘interest expense’ and ‘income from Islamic banking business’ in the statements of income using
the effective interest/profit method.

The effective interest/profit method is a method of calculating the amortised cost of a financial asset or a financial
liability and of allocating the interest and financing income or interest/profit expense over the relevant period. The
effective interest/profit rate is the rate that exactly discounts estimated future cash payments or receipts through the
expected life of the financial instruments or, when appropriate, a shorter period to the net carrying amount of the
financial asset or financial liability. When calculating the effective interest/profit rate, the Group takes into account all
contractual terms of the financial instrument and includes any fees or incremental costs that are directly attributable to
the instrument and are an integral part of the effective interest/profit rate, but not future credit losses.

Interest/profit on impaired financial assets is recognised using the rate of interest/profit used to discount the future cash
flows for the purpose of measuring the impairment loss. A financial asset or a group of financial assets is deemed to be
impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred
after the initial recognition of the asset (an incurred ‘loss event’) and that loss event (or events) has an impact on the
estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated.

When a loan/financing receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being
the estimated future cash flow discounted at the original effective interest/profit rate of the instrument, and continues
unwinding the discount as interest/profit income. Interest/profit income on impaired loan/financing are recognised
using the original effective interest/profit rate.

C Recognition of fees and other income

Loan arrangement fees and commissions are recognised as income when all conditions precedent are fulfilled. Guarantee
fees which are material are recognised as income based on time apportionment. Services charges and other fee income
are recognised as income when the services are rendered.

Commitment fees for loans, advances and financing that are likely to be drawn down and deferred (together with direct
costs) and income which forms an integral part of the effective interest rate of a financial instrument is regarded as an
adjustment to the effective interest rate of the financial instrument.

Dividends from financial assets held at fair value through profit or loss, financial investments available-for-sale and
subsidiary companies are recognised when the right to receive payment is established. This applies even if they are paid
out of pre-acquisition profits. However, the investment may need to be tested for impairment as a consequence.

Net profit from financial assets held at fair value through profit or loss and financial investment available-for-sale are
recognised upon disposal of the securities, as the difference between net disposal proceeds and the carrying amount of
the securities.

D Financial assets

(i) Classification

The Group and the Bank classify their financial assets into the following categories: at fair value through profit or
loss, loans and receivables, financial investments held-to-maturity and financial investments available-for-sale.
The classification depends on the purpose for which the financial assets were acquired. Management determines
the classifications of its securities at initial recognition and, in the case of assets classified as held-to-maturity, re-
evaluates this designation at the end of each reporting period.

(a) Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss comprise financial assets held-for-trading and other financial
assets designated by the Group and the Bank as fair value through profit or loss upon initial recognition.

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Notes to the financial statements

for the financial year ended 30 June 2018

2 Summary of significant accounting policies (continued)

D Financial assets (continued)

(i) Classification (continued)

(a) Financial assets at fair value through profit or loss (continued)

A financial asset is classified as held-for-trading if it is acquired or incurred principally for the purpose of
selling or repurchasing it in the near term or if it is part of a portfolio of identified financial instruments that
are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking.
Derivatives are also categorised as held-for-trading unless they are designated and effective as hedging
instruments.

(b) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not
quoted in an active market.

(c) Financial investments held-to-maturity

Financial investments held-to-maturity are non-derivative instruments with fixed or determinable payments
and fixed maturities that the management has the positive intention and ability to hold to maturity. If the
Group or the Bank sell other than an insignificant amount of financial investments held-to-maturity, the
entire category will be tainted and reclassified as financial investments available-for-sale.

(d) Financial investments available-for-sale

Financial investments available-for-sale are those intended to be held for an indefinite period of time, which
may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices or
that are not classified as financial assets at fair value through profit or loss, loans and receivables and financial
investments held-to-maturity.

(ii) Recognition and initial measurement

Financial assets are initially recognised at fair value plus transaction costs that are directly attributable to the
acquisition of the financial asset for all financial assets not carried at fair value through profit or loss. Transaction
costs for securities carried at fair value through profit or loss are taken directly to the statements of income.

(iii) Subsequent measurement

Financial assets at fair value through profit or loss and financial investments available-for-sale are subsequently
carried at fair value, except for investments in equity instruments that do not have a quoted market price in an
active market and whose fair value cannot be reliably measured in which case the investments are stated at cost.
Gains and losses arising from changes in the fair value of the financial assets at fair value through profit or loss are
included in the statements of income in the financial period which they arise. Gains and losses arising from changes
in fair value of financial investments available-for-sale are recognised directly in other comprehensive income, until
the securities are derecognised or impaired at which time the cumulative gains or losses previously recognised in
other comprehensive income are recognised in statements of income. Foreign exchange gains or losses of financial
investments available-for-sale are recognised in the statements of income in the financial period it arises.

Financial investments held-to-maturity are subsequently measured at amortised cost using the effective interest
method. Gains or losses arising from the de-recognition or impairment of the securities are recognised in the
statements of income.

Interest from financial assets held at fair value through profit or loss, financial investments available-for-sale and
financial investments held-to-maturity is calculated using the effective interest method and is recognised in the
statements of income. Dividends from available-for-sale equity instruments are recognised in the statements of
income when the entity’s right to receive payment is established.

150

ANNUAL
REPORT
2018

HONG LEONG BANK BERHAD

Notes to the financial statements

for the financial year ended 30 June 2018

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

D Financial assets (continued)

(iii) Subsequent measurement (continued)

Loans and receivables are initially recognised at fair value – which is the cash consideration to originate or purchase
the loan including the transaction costs, and measured subsequently at amortised cost using the effective interest
rate method. Interest on loans is included in the statements of income. In the case of impairment, the impairment
loss is reported as a deduction from the carrying value of the loan and recognised in the statements of income.

(iv) Reclassification of financial assets

The Group and the Bank may choose to reclassify a non-derivative financial assets held-for-trading out of the held-
for-trading category if the financial asset is no longer held for the purposes of selling in the near term. Financial
assets other than loans and receivables are permitted to be reclassified out of the held-for-trading category only
in rare circumstances arising from a single event that is unusual and highly unlikely to recur in the near term.
In addition, the Group and the Bank may choose to reclassify financial assets that would meet the definition of
loans and receivables out of the held-for-trading or available-for-sale categories if the Group and the Bank have
the intention and ability to hold these financial assets for the foreseeable future or until maturity at the date of
reclassification.

Reclassifications are made at the fair value at the date of the reclassification. The fair values of the securities
becomes the new cost or amortised cost as applicable, and no reversals of fair value gains or losses recorded
before the reclassification date are subsequently made. The effective interest rates for the securities reclassified to
held-to-maturity category are determined at the reclassification date. Further changes in estimates of future cash
flows are recognised as an adjustment to the effective interest rates.

E Financial liabilities

Financial liabilities are measured at amortised cost, except for trading liabilities and liabilities designated at fair value,
which are held at fair value through profit or loss. Financial liabilities are initially recognised at fair value plus transaction
costs for all financial liabilities not carried at fair value through profit or loss. Financial liabilities at fair value through profit
or loss are initially recognised at fair value, and transaction costs are expensed in statements of income.

(i) Financial liabilities at fair value through profit or loss

This category comprises two sub-categories: financial liabilities classified as held-for-trading and financial liabilities
designated at fair value through profit or loss upon initial recognition.

A financial liability is classified as held-for-trading if it is acquired or incurred principally for the purpose of selling
or repurchasing it in the near term or if it is part of a portfolio of identified financial instruments that are managed
together and for which there is evidence of a recent actual pattern of short-term profit-taking. Derivatives are also
categorised as held-for-trading unless they are designated and effective as hedging instruments.

The Group and the Bank have also designated certain structured deposits at fair value through profit or loss
as permitted under MFRS 139 “Financial Instruments: Recognition and Measurement” as it significantly reduces
accounting mismatch that would otherwise arise from measuring the corresponding assets and liabilities on
different basis.

(ii) Financial liabilities at amortised cost

Financial liabilities that are not classified as at fair value through profit or loss fall into this category and are
measured at amortised cost.

Financial liabilities that are derecognised when they have been redeemed or otherwise extinguished.

151

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REPORT

2018

FINANCIALS

Notes to the financial statements

for the financial year ended 30 June 2018

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

F Property and equipment and depreciation

Property, plant and equipment are initially recorded at cost net of the amount of goods and services tax (“GST”) except
where the amount of GST incurred is not recoverable from the government. When the amount of GST incurred is not
recoverable from the government, the GST is recognised as part of the cost of acquisition of the property, plant and
equipment. The cost of an item of property, plant and equipment initially recognised includes its purchase price and
any cost that is directly attributable to bringing the asset to the location and condition necessary for it to be capable of
operating in the manner intended by management. Cost also includes borrowing costs that are directly attributable to the
acquisition, construction or production of a qualifying asset. With effect from 1 June 2018, GST is reduced from 6% to 0%.

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only
when it is probable that future economic benefits associated with the item will flow to the Group and the Bank and the
cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs
and maintenance are charged to the statements of income during the financial period in which they are incurred.

Freehold land is not depreciated as it has an infinite life. Other property and equipment are depreciated on a straight line
basis to write off the cost of the assets to their residual values over their estimated useful lives, summarised as follows:

Leasehold land Over the remaining period of the lease or 100 years (1%) whichever is shorter

Buildings on freehold land 2%

Buildings on leasehold land Over the remaining period of the lease or 50 years (2%) whichever is shorter

Office furniture, fittings, equipment

and renovations and computer equipment 10% - 33%

Motor vehicles 25%

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period.

Depreciation on assets under construction commences when the assets are ready for their intended use.

Property and equipment are reviewed for indication of impairment at each statements of financial position date and
whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Where the
carrying amount of an asset is greater than its estimated recoverable amount, it is written down to its recoverable amount.

Gains and losses on disposals are determined by comparing proceeds with the carrying amount and are included in non-
interest income.

G Intangible assets

(i) Computer software

Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use
the specific software. These costs are amortised over their estimated useful lives of 3 years to 8 years.

(ii) Goodwill

Goodwill arises on the acquisition of subsidiaries and represents the excess of the aggregate of the acquisition
date fair value of consideration transferred, the amount of any non-controlling interest in the acquiree and the
acquisition-date fair value of any previous equity interest in the acquiree over the net of the acquisition date fair
value of the identifiable assets acquired and liabilities assumed. If the fair value of consideration transferred, the
amount of non-controlling interest and the fair value of previously held interest in the acquiree are less than the
fair value of the net identifiable assets of the acquiree, the resulting gain is recognised in the profit or loss.

152

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REPORT
2018

HONG LEONG BANK BERHAD

Notes to the financial statements

for the financial year ended 30 June 2018

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

G Intangible assets (continued)

(ii) Goodwill (continued)

Goodwill is allocated to cash-generating units (“CGUs”) for the purpose of impairment testing. The allocation is
made to those cash-generating units or groups of cash-generating units that are expected to benefit from the
synergies of the business combination in which the goodwill arose. Each unit or group of units to which the
goodwill is allocated represents the lowest level within the entity at which goodwill is monitored for internal
management purposes. Goodwill is tested annually for impairment or more frequently if events or changes in
circumstances indicate a potential impairment. The carrying value of goodwill is compared to the recoverable
amount, which is the higher of value in use and the fair value less cost of disposal. Any impairment is recognised
immediately as an expense and is not subsequently reversed.

(iii) Other intangible assets

Other intangible assets include core deposits and customer relationships. These intangible assets were acquired in
a business combination and are valued using income approach methodologies. These intangible assets are stated
at cost less accumulated amortisation and any accumulated impairment losses.

Other intangible assets have finite useful lives as follows:

Core deposit: 7 years
Customer relationships: 10 years

H Leases

(i) Finance lease

Assets purchased under lease which in substance transfers the risks and rewards of ownership of the assets to
the Group or the Bank are capitalised under property and equipment. The assets and the corresponding lease
obligations are recorded at the lower of the present value of the minimum lease payments or the fair value of the
leased assets at the beginning of the lease term. Such leased assets are subject to depreciation on the same basis
as other property and equipment.

Leases which do not meet such criteria are classified as operating lease and the related rentals are charged to
statements of income.

(ii) Operating lease

Leases of assets under which all the risks and rewards of ownership are retained by the lessor are classified as
operating leases. Payments made under operating leases are charged to the statements of income on a straight
line basis over the period of the lease.

When an operating lease is terminated before the lease period has expired, any payment required to be made to
the lessor by way of penalty is recognised as an expense in the period in which termination takes place.

153

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FINANCIALS

Notes to the financial statements

for the financial year ended 30 June 2018

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

I Impairment of non-financial assets

Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets
that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that
the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying
amount of the assets exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less
cost of disposal and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for
which separately identifiable cash flows which are largely independent of the cash inflows from other assets or groups
of assets (cash generating units). Non-financial assets other than goodwill that suffered impairment are reviewed for
possible reversal of the impairment at each reporting date.

The impairment loss is charged to the statements of income unless it reverses a previous revaluation in which case it is
charged to the revaluation surplus. Any subsequent increase in recoverable amount of non-financial assets (other than
goodwill) is recognised in the statements of income unless it reverses an impairment loss on a revalued asset in which
case it is taken to revaluation surplus.

J Current and deferred income taxes

The tax expense for the period comprises current and deferred income tax. The income tax expense or credit for the period
is the tax payable on the current period’s taxable income based on the applicable income tax rate for each jurisdiction
adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses.
Tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or
directly in equity. In this case, the tax is recognised in other comprehensive income or directly in equity, respectively. The
liabilities in relation to tax penalties or its associated interest are included within the taxation liability on the statement of
financial position and charged to the tax expense in the statements of income as under provision of prior year tax.

Current income tax expense is determined according to the tax laws enacted or substantially enacted at the end of the
reporting period of each jurisdiction in which the Group operates and generates taxable income and includes all taxes
based upon the taxable profits.

Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax
regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to
be paid to the tax authorities. This liability is measured using the single best estimate of the most likely outcome.

Deferred income tax is recognised in full, using the liability method, on temporary differences arising between the tax
bases of assets and liabilities and their carrying amounts in the financial statements. However, deferred tax liabilities are
not recognised if they arise from the initial recognition of goodwill. Deferred income tax is not accounted for if it arises
from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the
transaction affects neither accounting nor taxable profit or loss.

Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against
which the temporary differences of unused tax losses or unused tax credits can be utilised.

Deferred tax liability is recognised on temporary differences arising on investments in subsidiaries, associates and joint
ventures except where the timing of the reversal of the temporary difference can be controlled by the Group and it is
probable that the temporary difference will not reverse in the foreseeable future. Generally the Group is unable to control
the reversal of the temporary difference for associates and joint ventures. Only where there is an agreement in place that
gives the Group the ability to control the reversal of the temporary difference, a deferred tax liabilities is not recognised.

154

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HONG LEONG BANK BERHAD

Notes to the financial statements

for the financial year ended 30 June 2018

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

J Current and deferred income taxes (continued)

Deferred income tax assets are recognised on deductible temporary differences arising from investments in subsidiaries,
associates and joint arrangements only to the extent that it is probable the temporary difference will reverse in the
future and there is sufficient taxable profit available against which the deductible temporary difference can be utilised.

Deferred income tax related to fair value re-measurement of financial instruments available-for-sale, which are charged
or credited directly to equity, is also credited or charged directly to equity and is subsequently recognised in the
statements of income together with the deferred gain or loss.

Deferred income tax is determined using tax rates (and tax laws) that have been enacted or substantively enacted by
the end of the reporting period and are expected to apply when the related deferred tax asset is realised or the deferred
tax liability is settled.

Deferred and income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax
assets against current tax liabilities and when the deferred income tax assets and liabilities relate to taxes levied by the
same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the
balances on a net basis.

K Derivative financial instruments and hedging

Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are
subsequently remeasured at their fair value at the end of each reporting period. Fair values are obtained from quoted
market prices in active markets, including recent market transactions, and valuation techniques, including discounted
cash flow models and option pricing models, as appropriate. All derivatives are carried as assets when fair value is
positive and as liabilities when fair value is negative. Changes in the fair value of any derivatives that do not qualify for
hedge accounting are recognised immediately in the statements of income. Cash collateral held in relation to derivative
transactions are carried at amortised cost.

The best evidence of fair value of a derivative at initial recognition is the transaction price (i.e. the fair value of the
consideration given or received) unless the fair value of the instrument is evidenced by comparison with other observable
current market transactions in the same instrument (i.e. without modification or repackaging) or based on a valuation
technique whose variables include only data from observable markets. When such evidence exists, the Group and the
Bank recognise profits immediately.

The method of recognising the resulting fair value gain or loss depends on whether the derivative is designated as
a hedging instrument, and if so, the nature of the item being hedged. The Group and the Bank designated certain
derivatives as either: (1) hedges of the fair value of recognised assets or liabilities or firm commitments (fair value
hedge) or (2) hedges of highly probable future cash flows attributable to a recognised asset or liability, or a forecasted
transaction (cash flow hedge) or (3) hedges of a net investment in a foreign operation (net investment hedge). Hedge
accounting is used for derivatives designated in this way provided certain criteria are met.

At the inception of the transaction, the Group and the Bank document the relationship between hedging instruments and
hedged items, as well as their risk management objective and strategy for undertaking various hedge transactions. The
Group and the Bank also document their assessment, both at hedge inception and on an ongoing basis, of whether the
derivatives that are used in hedging transactions have been and will continue to be highly effective in offsetting changes
in fair values or cash flows of hedged items.