BBA 3002

FINANCIAL STATEMENT ANALYSIS

CHUANG WAN YIK

202389

950314-01-5432

AUGUST 2016
Contents

title page

INTRODUCTION 2-6

BODY 7-23

CONCLUSION 24

REFERENCE 25

COURSEWORK 26-29

Page 1 of 30
Introduction
Background of each selected company.

Hong Leong Bank Berhad ("Hong Leong Bank" or "Bank"), a public listed company on

Bursa Malaysia, is a member of the Hong Leong Group Malaysia ("the Group").

Headquartered in Malaysia, the Group has been in the financial services industry since

1968 through Hong Leong Finance Berhad and since 1982 through Dao Heng Bank Ltd.

in Hong Kong. Dao Heng Bank Ltd. has since been sold to another banking institution.

Hong Leong Bank started its humble beginning in 1905 in Kuching, Sarawak, Malaysia

under the name of Kwong Lee Mortgage and Remittance Company and later in 1934,

incorporated as Kwong Lee Bank Ltd.. In 1989, it was renamed MUI Bank, operating in

35 branches. In January 1994, the Group acquired MUI Bank through Hong Leong

Credit Berhad (now known as Hong Leong Financial Group Berhad). This milestone

saw the birth of Hong Leong Bank and in October the same year, Hong Leong Bank

was listed on the Kuala Lumpur Stock Exchange (now known as Bursa Malaysia).

In 2004, the finance company business of Hong Leong Finance Berhad was acquired by

Hong Leong Bank. With more than 100 years of banking knowledge and experience,

Hong Leong Bank today has a strong heritage, leading market positions and a well-

recognised business franchise and brand. In 2011, Hong Leong Bank completed the

merger with EON Bank Group. The merger effectively transforms the Bank into a

banking group of more than RM145 billion in assets and an expanded network of 329

Page 2 of 30
branches nationwide. With an extensive distribution network of over 300 branches,

sales and business centres in Malaysia, Singapore, Hong Kong, Vietnam and Cambodia

along with a comprehensive range of alternate and electronic channels including self-

service terminals, Hong Leong Call Centre, Hong Leong Online Banking and Hong

Leong Mobile Banking, Hong Leong Bank reaches out to its customers in all of the

communities in which it operates. Following its commitment to stay relevant, Hong

Leong Bank also launched Mach by Hong Leong Bank in 2012, a sub-brand that brings

together “bricks and clicks” to offer a range of life starter products and services targeted

to meet the needs of the Gen-Y community. Reaching out beyond the shores of

Malaysia, in 2008, Hong Leong Bank was the first Malaysian bank to enter the Chinese

banking sector with a 20% strategic shareholding in Bank of Chengdu Co., Ltd. In

December of the same year, Hong Leong Bank became the first and only Malaysian and

Southeast Asian bank to be granted a license to incorporate and operate a 100% wholly-

owned commercial bank in Vietnam. In 2013, Hong Leong Bank proudly launched its

100% wholly-owned commercial bank in Cambodia. The Bank has also established a

representative office in Nanjing in February 2014.Hong Leong Group Malaysia is one

of the largest business groups in Malaysia and internationally. The strong foundation

and solid growth of the Group is attributed to the Power of Vision - the Vision of its

Chairman and Chief Executive Officer, Tan Sri Quek Leng Chan. Today, the Vision is

manifested and entrenched in the Group's corporate culture, which is firmly rooted on

Page 3 of 30
the Group's core values of Quality, Entrepreneurship, Innovation, Honour, Human

Resource, Unity, Progress and Social Responsibility. The Group's "Reaching Out to

You" embeds the organisation in the country and community within which it operates.

Through its financial services arm Hong Leong Financial Group Berhad, which consists

of Hong Leong Bank, Hong Leong Assurance and Hong Leong Investment Bank, the

Group is well positioned as an integrated financial services provider.

The Public Bank Group is widely acknowledged for its performance in achieving the

highest net return on equity, lowest cost to income ratio and best asset quality amongst

Malaysian banking groups.Founded in 1966 by its Founder and Chairman, Tan Sri

Dato’ Sri Dr. Teh Hong Piow, Public Bank enters into its 50th year of operations in

2016. Today, the Public Bank Group is the third largest banking group in Malaysia with

an asset size of RM363.76 billion as at the end of 2015. Listed on the Main Board of

Bursa Malaysia in 1967, the Group is the third largest company with a market

capitalisation of RM71.90 billion as at the end of 2015. With five decades of sustainable

growth, the Group employs more than 18,000 staff and serves more than 9 million

customers across the region.To date, the Public Bank Group provides a comprehensive

range of financial products and services comprising personal banking, commercial

banking, Islamic banking, investment banking, share broking, trustee services, nominee

services, sale and management of unit trust funds, banc assurance and general insurance

products. The Group’s strategy remains focused on organic growth in the retail banking

Page 4 of 30
business, particularly on the retail consumers and small and medium enterprises

(“SMEs”). As one of the top-tier banks in Malaysia, the Group is committed to sustain

its strong business momentum and leading market positions.With a strong tradition of

service excellence, Public Bank reaches out to its customers via a network of 259 well

distributed branches and over 2,000 self service terminals in Malaysia. In addition to its

strong domestic operations, the Group has extensive branch network in the region with

a network of 83 branches in Hong Kong, 3 branches in China, 28 branches in

Cambodia, 7 branches in Vietnam, 4 branches in Laos and 3 branches in Sri Lanka.

Reputed for its strong financial performance and consistent prudent management, the

Public Bank Group continues to be accorded with strong credit and financial ratings

from local and foreign rating agencies. Standard & Poor’s reaffirmed Public Bank’s A-

long-term rating and A-2 short-term counterparty credit rating with stable outlook.

Moody’s Investors Service reaffirmed Public Bank’s foreign currency long-term deposit

rating of A3 and short-term deposit rating of P-2 with stable outlook. Rating Agency

Malaysia reaffirmed the Bank’s long-term rating of AAA, the highest rating accorded

by Rating Agency Malaysia, and its short-term rating of P1 with stable outlook. Public

Bank’s undivided commitment to prudent management and performance excellence

continues to be accorded international and domestic recognitions. In 2015, Public Bank

was named the Strongest Bank in Malaysia by balance sheet in the Asian Banker 500

Strongest Bank. The Group has been bestowed with many best bank awards and

Page 5 of 30
excellence in corporate governance by other national and international publications. The

Group will not be complacent but will continue to strive for greater performance

excellence. As a responsible corporate citizen, the Public Bank Group remains

committed towards improving the quality of life of the workforce and their families as

well as the community and society at large. Through its Corporate Social Responsibility

initiatives, the Group continues to focus on nation building, enhancement of the market

place, promotion of the workplace and environment conservation. These initiatives are

implemented through the Group’s participation in programmes involving education,

graduate employment, professional development, healthcare as well as support of the

underprivileged. The Group will continue to seek ways to create a better community

and corporate environment for everyone involved.

Page 6 of 30
Body

1) Prepare simplified balance sheet and income statement for each company.

Balance sheet of Public Bank 31 December 2015

Asset RM'000

Cash and balance with banks 9098632

Reverse repurchase agreements 3740691

Financial assists hole-for-trading 1442617

Derivative financial assets 677630

Financial investment available -for-sale 23086012

Financial investment held-to-maturity 17685187

Loans, advances and financing 219872074

Other assets 3071000

Statutory deposits with Central Bank 7455845

Deferred tax assets 一

Investment in subsidiary companies 4674545

Investment in associated companies 121295

Investment properties 一

Property and equipment 651470

Intangible assets 695393

Total Assets 292272391

Page 7 of 30
Liabilities  

Deposits from customers 236460158

Deposits from bank 10563090

Bills and acceptances payable 362043

Recourse obligations on loans and financing sold to

Cagamas 1422005

Derivative financial liabilities 1045621

Debt securities issued and other borrowed funds 10565149

Other liabilities 3388373

Provision for tax expense and zakat 413764

Deferred tax liabilities 107001

total Liabilities 264327204

Equity  

Share capital 3882138

Reserves 24212386

Treasury shares -1493377

Equity attributable to equity holders to the Bank 27945187

Non-controlling interests 一

Total Equity 27945187

Page 8 of 30
Total Liabilities and Equity 292272391

Commitments and contingencies 100614706

Balance sheet of Hong Leong Bank 31 June 2015

Asset RM'000

Cash and balance with banks 4972372

Deposits and placements with banks and other financial

institutions 4340892

Securities purchased under resale agreements 12163252

Financial assets held-for-trading 7123538

Financial investments available - for-sale 17370438

Financial investments held-to-futurity 8618741

Loans, advances and financing 95563493

Other assets 1149905

Derivative financial instrurnents 1421571

Amount due from subsidiaries 12984

Statutory deposits with Central Banks 2859590

Subsidiary companies 1358443

Investment in joint venture 76711

Page 9 of 30
Investment in associated companies 946525

Property and equipment 627784

Intangible assets 302801

Goodwill 1771547

Total assets 160680587

Liabilities  

Deposits from customers 122337044

Deposits and placements with banks and other financial

institutions 6133109

Obligations on securities sold under repurchase agreements 3691338

Bills and acceptances payable 1874138

Derivative financial instrurnents 1263894

Other liabilities 3264006

Senior bonds 2286380

Tier 2 subordinated bonds 4219507

Non-innovative Tier 1stapled securities 1410869

Innovative Tier 1 capital securities 530223

Taxation 160243

Deferred tax liabilities 75672

Page 10 of 30
Total liabilities 147252423

Equity  

Share capital 1879909

Reserves 12196843

Less: Treasury shares -648588

Total Equity 13428164

Total liabilities and Equity 160680587

Commitments and contingencies 142453657

Income Statements of Public Bank 31 December 2015 RM’000

Operating Revenue 13941929

12964990

Interest income 0

Interest expense -7571570

Net interest income 5393720

Net income from Islamic banking business 一

Fee and commission income 937033

Fee and commission expense -295692

Net fee and commission income 641341

Page 11 of 30
Net gains and losses on financial instruments 232404

Other operating income 658030

Net income 6925495

Other operating expenses -1939050

Operating profit before impairment losses 4986445

(Allowance)/Write back of allowance for impairment on

loans ,advances and financing 14163

(Impairment)/Write back of impairment on other assets -528

  5000080

Share of profit after tax of equity accounted associated

companies 一

Profit before tax expense and zakat 5000080

Tax expense and zakat -1011451

Profit for the year 3988629

Income Statements of Hong Leong 30 June 2015 RM'000

Interest income 6070039

Interest expense -3381630

Net interest income 2688409

Page 12 of 30
Income from Islamic Banking business 一

  2688409

Non-interest income 1095896

Overhead expenses -1582281

Operating profit before allowances 2202024

Write back of / (allowances for) impairment losses on

loans ,advances and financing 53705

Write back of impairment losses 23462

  2279191

Share of results of associated company 一

Share of results of joint venture 一

Profit before taxation 2279191

Taxation -503228

Net profit for the financial year 1775963

Page 13 of 30
2) Draw up common-size statement for each company

a) Common - size Balance Sheet of Public Bank and Hong Leong Bank

  Public Bank Hong Leong Bank

Assets RM'000

Cash and short-term funds 9098632 3.11% 4972372 3.09%

Reverse repurchase agreements 3740691 1.28% * *

Securities purchased under resale

agreements * * 12163252 72.90%

Financial assets held-for-trading 1442617 0.49% 7123538 4.43%

Derivative financial assets 677630 0.23% 1421571 0.88%

Financial investment available -

for-sale 23086012 7.91% 17370438 1.10%

Financial investment held-to-

maturity 17685187 6.05% 8618741 5.36%

Loans, advances and financing 219872074 15.20% 95563493 59.50%

Other assets 3071000 1.05% 1149905 0.72%

Investment in associated

companies 121295 0.04% 946525 0.59%

Property and equipment 651470 0.04% 627784 0.39%

Investment in subsidiary 4674545 1.60% 1358443 0.85%

Page 14 of 30
companies

Statutory deposits with Central

Bank 7455845 2.60% 2859590 1.77%

Intangible assets 695393 0.24% 302801 0.19

Deferred tax assets * * * *

Investment properties * * * *

Deposits and placements with

banks and other financial

institutions * * 4340892 2.70%

Amount due from subsidiaries * * 12984 0.01%

Investment in joint venture * * 76711 0.05%

Good will * * 1771547 1.10%

Total Assets 292272391 39.80% 160680587 156%

Liabilities        

Deposits from customers 236460158 89.40% 122337044 83%

Deposits from bank and other

financial institutions 10563090 4% 6133109 4.17%

Bills and acceptances payable 362043 0.14% 1874138 1.27%

Other liabilities 3388373 1.78% 3264006 2.21%

Deferred tax liabilities 107001 0.04% 75672 0.05%

Page 15 of 30
Recourse obligations on loans

and financing sold to Cagamas 1422005 0.54% * *

Derivative financial liabilities 1045621 0.04% * *

Debt securities issued and other

borrowed fund 10565149 4% * *

Provision for tax expense and

zakat 413764 0.16% * *

Obligations on securities sold

under repurchase agreements * * 3691338 2.50%

Derivative financial instruments * * 1269894 0.87%

Senior bonds * * 2286380 1.55%

Tier 2 subordinated bonds * * 4219507 2.87%

Non-innovative tier 1 stapled

securities * * 1410869 0.96%

Innovative Tier 1 capital

securities * * 530223 0.36%

Taxation * * 160243 0.11%

Total Liabilities 264327204 100.10% 142453657 99.92%

Equity        

Page 16 of 30
 Share capital 3882138 13.89% 1879909 14.00%

Resaves 24212386 86.60% 12196843 90.80%

Less: Treasury Shares -149337 0.53% -6485855 4.82%

Total Equity 27945187 101.02% 13428164 109.62%

(b) Common – size income statements of Public Bank and Hong Leong Bank

  Public Bank Hong Leong Bank

  RM'000

Operating revenue 13941929 * * *

Interest income 12964990 93.00% 6070039 160.40%

Interest expense -7571270 54.30% -3381630 89.40%

Net interest income 539720 3.90% 2688409 71.00%

Net income from Islamic banking

business * * * *

Fee and commission income 937033 6.72% * *

Fee and commission expense -295692 2.12% * *

Net fee and commission income 641341 4.60% * *

Net gains and losses on financial

instruments 232404 1.67% * *

Page 17 of 30
Other operating income 658030 4.72% * *

Net income 6925495 49.70% 3784305 *

Other operating expenses -1939050 13.90% -1582281 41.81%

Operating profit before

impairment losses 4986445 35.80% 2202024 58.10%

Impairment on loans 14163 0.10% 55705 1.42%

Other assets -5.28 0.00% * *

Share of results of associated

cornpone * * * *

Share of results of joint venture * * * *

Profit before tax expense and

zakat 5000080 35.90% 2279191 60.23%

Tax expense and zakat -1011451 0.73% -503228 13.30%

Non - interest income * * 1095896 29.00%

Net Profit for the financial year 3988629 307.16% 1775963 525%

Page 18 of 30
3) Compute the principle financial ration (at least 6 financial ratios are required)

(a) Total assets turnover

Asset turnover ratio is the ratio of the value of a company’s sales or revenues generated

relative to the value of its assets. The Asset Turnover ratio can often be used as

an indicator of the efficiency with which a company is deploying its assets in generating

revenue. Asset Turnover = Sales or Revenues / Total Assets

i) Public Bank

168660071/292272391 = 0.06%

ii) Hong Leong Bank

3784305/160680587= 0.02%

(b) Return on total assets

The return on total assets (ROTA) is a ratio that measures a company's earnings before

interest and taxes (EBIT) against its total net assets. The ratio is considered to be an

indicator of how effectively a company is using its assets to generate earnings before

contractual obligations must be paid.

(i) Public Bank

(6925495+ 7571270)/292272391 = 0.05%

(ii) Hong Leong Bank

(3784305+3381630)/160680587=0.04%

(c) Return on equity

Page 19 of 30
Return on equity (ROE) is the amount of net income returned as a percentage

of shareholders equity. Return on equity measures a corporation's profitability by

revealing how much profit a company generates with the money shareholders have

invested. ROE is expressed as a percentage and calculated as: Return on Equity = Net

Income/Shareholder's Equity

(i) Public Bank

6925495/27945187 = 0.25%

(ii) Hong Leong Bank

3784305/13428164 = 0.28%

(d)Total debt ratio

A financial ratio that measures the extent of a company’s or consumer’s leverage. The

debt ratio is defined as the ratio of total – long-term and short-term – debt to total assets,

expressed as a decimal or percentage. It can be interpreted as the proportion of a

company’s assets that are financed by debt.

(i) Public Bank

264327204/292272391=0.90%

(ii) Hong Leong Bank

147252423/160680587=0.91%

(e) Net loan to deposit ration

Page 20 of 30
The loan-to-deposit ratio (LTD) is a commonly used statistic for assessing a

bank's liquidity by dividing the bank's total loans by its total deposits. This number is

expressed as a percentage. If the ratio is too high, it means that the bank may not have

enough liquidity to cover any unforeseen fund requirements, and conversely, if the ratio

is too low, the bank may not be earning as much as it could be.

(i) Public Bank

219872074/10563090 = 20.8%

(ii) Hong Leong Bank

95563493/6133109 = 15.6%

(f) Current ratio

The current ratio is a liquidity ratio that measures a company's ability to pay short-

term and long-term obligations. To gauge this ability, the current ratio considers the

current total assets of a company (both liquid and illiquid) relative to that company’s

current total liabilities.

(i) Public Bank

9098632/362043=25.1%

(ii) Hong Leong Bank

4972372/1874138 = 2.7%

Public Bank Hong Leong

Banl

Page 21 of 30
 Total assets turnover 0.06 0.02

Return on total assets 0.05 0.04

Return on equity 0.25 0.28

Net loan to deposit ration 20.8 15.6

Current ratio 25.1 2.7

Total debt ratio 0.90 0.91

(a) Total assets turnover

Public Bank have a higher the total assets turnover (0.06%) than Hong Leong Bank

(0.02%).Public bank is more effective at using its assets but Hong Leong is less

effective at using its assets. Although the asset turnover ratio appears comparable across

companies, investors must thoroughly understand company strategy before employing

it. Companies within the same industries will show different asset turnover ratios

depending on their profit margin

(b) Return on total assets

Public Bank have a higher return on total assets (0.05%) than Hong Leong Bank

(0.04%).The Public Bank is have a good return on total assets because representing the

extra money paid for the company over and above its actual book value at the time of

acquisition.

(c) Return on equity

Page 22 of 30
Hong Leong Bank have a higher return on equity (0.28%) than Public Bank

(0.25%).The Hong Leong Bank has a good ROE because return on equity is the ratio of

a company's returns to the money put in by investors. As a financial measure, it offers a

number of benefits to investors who want insight into a company.

(d) Net loan to deposit ration

Public Bank have a higher net loan to deposit ratio (20.8%) than Hong Leong Bank is

low ratio (15.6%). The Public Bank is more the borrowed fund than Hong Leong Bank

is less than the borrowed fund. So the Hong Leong Bank is less the loan in the

company.

(e) Current ratio

Hong Leong Bank is less than the current ratio (2.7%) than the Public Bank (25.1).The

Public Bank is more stable the company but the Hong Leong is liquidity associated with

company.

(f) Total debt ratio

The Public Bank is less than the total debt ratio (0.90%) than the Hong Leong Bank

(0.91%).The Hong Leong is high the financial risk. So one company must be in part the

company.

Page 23 of 30
Conclusion

1) Summarize the financial performance of selected company

I think the future of public banks is better than Hong Leong Bank to, why do I think so?

First, we began to read from the stock there, menstrual Hong Leong Bank has a small

part of the people to buy shares of Hong Leong Bank and Public Bank out which is the

stock on hand, which means that said Hong Leong Bank needs funds so opted to sell

stock. Next Public Bank in the past several months there are signs of revenue growth,

and this year increased 8.74 percent on an increase of 3.53% compared to Hong Leong

Bank. Public Bank's earnings history next year increased by 22.92 percent compared to

Hong Leong Bank grew 5.85%. Therefore, I believe it will slow the development of

public banks in a few years and will continue to grow, while Public Bank Group can

expand to overseas. These are my opinion.

Page 24 of 30
Reference
http://markets.ft.com/data/equities/tearsheet/forecasts?s=HLBANK:KLS

http://markets.ft.com/data/equities/tearsheet/forecasts?s=PBBANK:KLS

http://www.investopedia.com/ask/answers/021215/what-good-debt-ratio-and-what-bad-

debt-ratio.asp

http://accounting-simplified.com/financial/ratio-analysis/debt-to-equity.html#analysis-

interpretation

Page 25 of 30
Coursework

Name : Chuang Wan Yik

Student ID : 202389

IC No : 95.314-01-5432

1. Accounting Entity. The accounting entity is the business unit (regardless of the legal

business form) for which the financial statements are being prepared. The accounting

entity principle states that there is a "business entity" separate from its owners... a

fictional "person" called a company for which the books are written.

2. Going Concern. Unless there is evidence to the contrary, accountants assume that the

life of the business entity is infinitely long. Obviously this assumption cannot be

verified and is hardly ever true. But this assumption does greatly simplify the

presentation of the financial position of the firm and aids in the preparation of financial

statements. If during the review of a corporation's books, the accountant has reason to

believe that the company may go bankrupt, he must issue a "qualified opinion" stating

the potential of the company's demise. More on this concept later.

3. Measurement. Accounting deals with things that can be quantified—resources and

obligations upon which there is an agreed-upon value. Accounting only deals with

things that can be measured. This assumption leaves out many very valuable company

"assets." For example, loyal customers, while necessary for company success, still

cannot be quantified and assigned a value and thus are not stated in the books. Financial

Page 26 of 30
statements contain only the quantifiable estimates of assets (what the business owns)

and liabilities (what the business owes). The difference between the two equals owner's

equity.

4. Units of Measure. U.S. dollars are the units of value reported in the financial

statements of U.S. companies. Results of any foreign subsidiaries are translated into

dollars for consolidated reporting of results. As exchange rates vary, so do the values of

any foreign currency denominated assets and liabilities.

5. Historical Cost. What a company owns and what it owes are recorded at their original

(historical) cost with no adjustment for inflation. A company can own a building valued

at $50 million yet carry it on the books at its $5 million original purchase price (less

accumulated depreciation), a gross understatement of value. This assumption can

greatly understate the value of some assets purchased in the past and depreciated to a

very low amount on the books. Why, you ask, do accountants demand that we obviously

understate assets? Basically, it is the easiest thing to do. You do not have to appraise

and reappraise all the time.

6. Materiality. Materiality refers to the relative importance of different financial

information. Accountants don't sweat the small stuff. But all transactions must be

reported if they would materially affect the financial condition of the company.

Remember, what is material for a corner drug store is not material for IBM (lost in the

rounding errors). Materiality is a straightforward judgment call.

Page 27 of 30
7. Estimates and Judgments. Complexity and uncertainty make any measurement less

than exact. Estimates and judgments must often be made for financial reporting. It is

okay to guess if (1) that is the best you can do and (2) the expected error would not

matter much anyway. But accountants should use the same guessing method for each

period. Be consistent in your guesses and do the best you can.

8. Consistency. Sometimes identical transactions can be accounted for differently. You

could do it this way or that way, depending upon some preference. The principle of

consistency states that each individual enterprise must choose a single method of

reporting and use it consistently over time. You cannot switch back and forth.

Measurement techniques must be consistent from any one fiscal period to another.

9. Conservatism. Accountants have a downward measurement bias, preferring

understatement to overvaluation. For example, losses are recorded when you feel that

they have a great probability of occurring, not later, when they actually do occur.

Conversely, the recording of a gain is postponed until it actually occurs, not when it is

only anticipated.

10. Periodicity. Accountants assume that the life of a corporation can be divided into

periods of time for which profits and losses can be reported, usually a month, quarter or

year.

11. Substance over Form. Accountants report the economic "substance" of a transaction

rather than just its form. For example, an equipment lease that is really a purchase

Page 28 of 30
dressed in a costume is booked as a purchase and not as a lease on financial statements.

This substance over form rule states that if it's a duck... then you must report it as a

duck. 12. Accrual Basis of Presentation. This concept is very important to understand.

Accountants translate into dollars of profit or loss all the money-making (or losing)

activities that take place during a fiscal period. In accrual accounting, if a business

action in a period makes money, then all its product costs and its business expenses

should be reported in that period. Otherwise, profits and losses could flop around

depending on which period entries were made

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