Highest growth in profit after tax over three years: Financial Services — RM10 bil and above market capitalisation: Hong Leong Financial Group Bhd - Staying strong in tough times

This article first appeared in The Edge Malaysia Weekly, on December 27, 2021 - January 09, 2022.
Highest growth in profit after tax over three years: Financial Services — RM10 bil and above market capitalisation: Hong Leong Financial Group Bhd - Staying strong in tough times
-A +A

Times have undoubtedly been hard for the financial services industry, which is highly sensitive to economic conditions, over the past three years. In addition to intense competition, banks are facing challenges such as margin compression, rising credit costs, asset quality and high bad debt provision. 

Yet, Hong Leong Financial Group Bhd (HLFG) has weathered the storm pretty well. 

The group has achieved a three-year compound annual growth rate of 7.2% in its profit after tax — the highest among its big-cap peers with a market capitalisation of RM10 billion or above in the financial services sector, although the group experienced an earnings contraction in the financial year ended June 30, 2020 (FY2020). 

HLFG’s net profit had been on an upward trend since FY2017. The group’s net profit grew 26.6% year on year (y-o-y) to RM1.91 billion in FY2018, from RM1.5 billion in FY2017. The improved performance was partly attributed to a lower effective tax rate of 19.1% in FY2018 versus 25% in FY2017. 

Its net profit grew marginally by 0.6% y-o-y to RM1.92 billion in FY2019 despite the net interest margin compression seen at its commercial banking business. Meanwhile, its total income was lower at RM5.28 billion in FY2019 compared with RM5.35 billion in FY2018.

The health and economic crisis brought about by the Covid-19 pandemic has disrupted HLFG’s growth pattern. Its net profit declined 3.2% to RM1.86 billion in FY2020. The lower earnings were due to the effects of lower interest rates and a one-off Day 1 modification loss taken at Hong Leong Bank Bhd (HLB).

Over the three financial years (FY2018-FY2020), HLFG’s book value per share has increased from RM14.52 as at June 30, 2017, to RM18.43 as at June 30, 2020.

For FY2020, HLFG recorded a lower return on equity at 9.3%, compared with 10.4% in FY2019, as a result of the drop in net profit. The group’s return on equity stood at 11.1% in FY2018.

The financial group did not stop rewarding shareholders with dividends. It declared a net dividend of 40 sen in FY2018, 42 sen FY2019 and 38 sen FY2020. Dividend declared was lower in FY2020 because it adopted a more prudent approach in respect of dividend payments, given the tougher economic conditions as a result of the pandemic.

The financial group’s three core businesses are commercial and Islamic banking under HLB, insurance and takaful under HLA Holdings Sdn Bhd, as well as investment banking and asset management under Hong Leong Capital Bhd.

“The group’s philosophy continues to embody an entrepreneurial vision focused on building long-term sustainable value for all its stakeholders,” says HLFG chairman Tan Sri Quek Leng Chan in its FY2021 annual report.

“This vision guides our operating businesses to remain relevant and be trustworthy, progressive, competitive and sustainable in pursuit of growth and the creation of business value.

“We believe the key to ensuring sustainability is the continued co-existence of entrepreneurialism and professional business management, and relevant transformation through technological innovation, together with a strategic approach in managing environmental, social and governance (ESG)-­related risks and impacts on our business,” Quek says.

He adds that the group is committed to investing in and embracing suitable digital technological platforms that will deliver sustainable business growth and operational excellence that are fit for the future.

“Digitalisation is a core part of the group’s business strategy to embrace technology and deliver a world-class digital experience to our customers across all our operating businesses,” he says.