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Letter to Shareholders
The financial year 2013 (FY2013) presented a challenging environment. Yet, BIMB Holdings Berhad (“BHB”) and its subsidiaries (“the Group”) continued to build on our strengths in terms of our financial and operational performance. Our robust foundations have allowed us to weather economic uncertainties and adapt to a new and more demanding regulatory environment while enhancing our business, and the trust of our stakeholders.
Notwithstanding the challenging economic and financial environment, the profitability of our main businesses in Islamic banking and takaful continue to record double digit growth, reiterating our prominence in the domestic Islamic financial landscape.
With the strong support of our shareholders, we also embarked on a major initiative to acquire the remaining 49% equity interest in Bank Islam Malaysia Berhad (“Bank Islam” or “the Bank”) held in aggregate by Dubai Financial Group (“DFG”) and Lembaga Tabung Haji (“LTH”) thereby taking full ownership of the country’s pioneering Islamic banking institution.
It has been a very exciting and fruitful year, and it gives me great pleasure to share the highlights of our financial and operational performance with you.
The year saw a gradual move towards global economic recovery. The United States (“US”) announced plans to taper its quantitative easing (“QE”) programme in May. By year end, the US economy had improved significantly such that domestic consumer confidence was at a five-year high. On a similar note, most countries in the Eurozone began to emerge from a debt-ridden recession that had been strangling growth for about 18 months. Full recovery, however, is still only on the horizon and the QE tapering has led to an outflow of funds from emerging markets.
Within the generally challenging global economy, the Islamic financial services industry remained a consistent top performer, growing 18.6% year-on-year (“YoY”) to reach an estimated USD1.8 trillion in assets as at end-2013. This was reflected in Malaysia where Islamic finance expanded at an encouraging rate, and the country retained its position as the world’s largest sukuk issuer with a 69% share of total issuances in 2013 amounting to almost USD83 billion.
As part of its aspiration to see Malaysia become the international Islamic financial hub, the Government has been supporting further expansion of this sector, and during the year new regulations were implemented to enhance the overall governance of Islamic financial institutions. On 1 July, Bank Negara Malaysia (“BNM”) implemented the Islamic Financial Services Act (“IFSA”) 2013 to replace the Islamic Banking Act 1983 and the Takaful Act 1984, providing a comprehensive legal and structural framework consistent with Shariah in all aspects of regulation and supervision, from licensing to the winding-up of a licensed institution. The IFSA also requires Islamic financial institutions to create greater clarity in their services and products to enhance consumer confidence.
As for the takaful industry, BNM issued a guideline requiring operators to separate their family and general takaful businesses within five years, and to carry out both businesses under two separate licenses. Although this may result in some administrative pressure and initial costs, we believe the initiative would ultimately create more focused strategies in the two different takaful segments and enhance efficiency levels in terms of governance, product offerings and customer service for the benefit of all stakeholders.
ACQUISITION OF 49% EQUITY INTEREST IN BANK ISLAM NOT HELD BY BHB
Bank Islam has consistently delivered a strong financial performance over the last few years, spurred by development strategies that aim to enhance growth in assets, financing and profitability, as well as improve its asset utilisation. During this time, BHB has been supportive of the Bank’s various growth initiatives as they contribute towards the Group’s overall earnings and profitability.
To reap the full benefits of Bank Islam’s future growth, we made the strategic decision to acquire the remaining 49% aggregate equity in the Bank, comprising DFG’s 30.5% and LTH’s 18.5% equity interests, for a total purchase consideration of USD884.6 million (approximately RM2.9 billion). The acquisitions were successfully completed on 19 December 2013, facilitated by a fund raising exercise comprising:
i. a renounceable rights issue of two new ordinary shares of RM1.00 each in BHB (“BHB Shares”) with two free detachable warrants for every five existing BHB Shares held (“Rights Issue”); and
ii. issuance of 10-year Islamic Sukuk Murabahah securities of RM1.66 billion in nominal value.
The Rights Issue to raise USD551.8 million (approximately RM1.8 billion) was awarded the ‘Equity Deal of the Year 2013’ by Islamic Finance News as well as ‘Equity Deal of the Year’ by Asian Legal Business. Going forward, with full ownership of our Islamic banking business, we will be in a better position to further leverage and enhance efficiencies, while creating even greater synergies within the Group with coherent corporate strategies.
Our banking, takaful and stockbroking subsidiaries experienced a very positive financial year ended 31 December 2013, which has been reflected in BHB’s performance. We posted a consolidated Profit Before Zakat and Taxation (“PBZT”) of RM819.4 million, marking an increase of RM102.0 million or 14.2% from the previous financial year. Our consolidated net profit, meanwhile, stood at RM563.2 million, 8.0% higher than the RM521.6 million recorded in the previous year.
Despite margin compression due to stiff competition, our total net income grew by 13.9% to RM2.0 billion, supported by net financing growth of RM4.2 billion or 21.7% at Bank Islam, and higher net income of RM80.7 million or 17.1% at Syarikat Takaful Malaysia Berhad (“Takaful Malaysia”).
Group operating overheads grew to RM1.2 billion, in tandem with total revenue growth and continued investment in talent and capital expenditure to support expansion of the Group’s business franchise. Consequently, our cost to net income ratio also increased from 57.9% to 60.1%.
Concerted efforts to improve asset quality led to a further reduction of our gross impaired financing ratio from 1.55% (as at end 2012) to 1.18% (as at end 2013). Total allowance for impairment on financing and advances declined by RM81.1 million due to higher recovery of bad debts and financing of RM114.6 million and lower individual impairment on financing of RM5.9 million. However, collective impairment was higher by RM39.4 million in tandem with financing growth.
Meanwhile, the total capital ratios of Bank Islam and its subsidiaries have been computed in accordance with requirements of the Capital Adequacy Framework for Islamic Banks (CAFIB) and Basel III as of 1 January 2013. These ratios remained healthy, exceeding BNM’s minimum capital requirements with Common Equity Tier 1 and Total Capital Adequacy Ratio (CAR) at 12.96% and 14.06% respectively as at 31 December 2013.
On 19 June 2013, the Company paid out RM37.3 million, or 19.5% of our net profit for the financial year under review, in the form of an interim single-tier dividend of 3.5%. In addition, the Board is proposing a final single-tier dividend of 8.5% for each ordinary share held at our forthcoming Annual General Meeting.
Solid financing growth, competitive product offerings and growth in non-fund based income led to Bank Islam Group recording a PBZT of RM677.3 million for the financial year ended 31 December 2013, an increase of RM79.9 million or 13.4% from the RM597.4 million achieved in 2012. This was achieved on the back of RM2.25 billion in revenue, the first time the Bank’s revenue has crossed the RM2 billion mark, a fitting achievement to celebrate its 30th anniversary.
The Bank’s net financing assets grew RM4.2 billion or 21.7% YoY to reach RM23.7 billion, leading to a 14.0% increase (RM240.1 million) in fund-based income mainly from financing. Non-fund based income, meanwhile, grew 5.4% or RM14.5 million mainly from foreign exchange transactions, fees and commission.
Customer deposits reported a YoY growth of 14.4% or RM4.7 billion to reach RM37.2 billion as at end 2013. Similarly, the Bank’s low cost current and savings accounts (“CASA”) increased by RM1.1 billion or 8.5% YoY, leading to a CASA ratio of 39.1%, well surpassing the Islamic banking industry ratio of 25.9% as at year end.
Along with the improvement in gross impaired financing ratio of 1.18%, the Bank’s net impaired financing ratio further improved from -0.67% as at end 2012 to -0.91% as at end 2013. Both figures mark a commendable performance compared to the gross and net impaired ratios of the Banking System which stood at 1.9% and 0.1% respectively. The Bank’s return on equity and return on assets (based on PBZT) also surpassed that of the Banking System, at 21.1% and 1.7% against 17.5% and 1.6% respectively.
At the end of the last financial year, Bank Islam launched a new corporate strategic plan to further build its fundamentals up to year 2015. Under this new plan, themed Hijrah to Excellence (“H2E”), the management aims for, amongst others, financing growth of between 20% and 25% per annum and pre-tax profit growth of 10% per annum. It also aims to improve its asset utilisation with a targeted financing to deposit ratio of 75% by 2015, from 65% as at end 2013. These targets are to be achieved by focusing on the following six pillars: robust organic growth, service excellence, Shariah-led innovation, resource optimisation, being an employer of choice and regionalisation.
In terms of innovation, the Bank introduced a number of products targeting different segments of its customer base. Supporting the Bank’s target of increasing its debit card retail spend by about 40% during the year, it launched a cobranded debit card with the Football Association of Malaysia – the Bank Islam Visa Debit Card-i Team Harimau – offering attractive benefits to football fans. Catering to the higher-end of its market, it subsequently launched the Visa Platinum Credit Card-i, enabling customers to enjoy an exclusive, luxury lifestyle and strengthening the Bank’s commitment to providing world-class service to niche market segments.
With pilgrims in mind, the Bank introduced the Labbaik Account-i, a two-in-one Mudharabah savings account tailored to help customers save to perform their Hajj. To facilitate the business development of small enterprises, it collaborated with ManagePay Systems Berhad to launch a mobile e-payment initiative that allows for payments through smartphones.
Pressing on with efforts to increase its customer deposits, Bank Islam took the Al-Awfar Million Ringgit Campaign launched in 2012 one step further with the Fast Lane to Become a Millionaire campaign, this time offering the chance for three customers who either deposit a minimum of RM1,000 in new accounts or who top up their existing accounts by RM1,000 to win RM1 million each. The successful campaign contributed to a 25.8% or RM366.5 million YoY increase in Al-Awfar deposits to reach RM1.8 billion as at 31 December 2013.
At the same time, the Bank continued to increase its presence nationwide to enable more convenient access to existing and potential customers by opening six (6) new branches in Taman Bukit Indah, Johor; Bandar Baru Tunjung, Kelantan; Sungai Buluh, Selangor; Kuala Lumpur Sentral 2, Kuala Lumpur; Senawang, Selangor; and Sungai Petani 2, Kedah; one (1) new Consumer Business Centre (“CBC”), three (3) new Bureaus de Change (“BDC”) and two (2) new Ar-Rahnu outlets. Its network at year end thus comprised 133 branches, six (6) CBCs, seven (7) BDCs and six (6) Ar-Rahnu outlets.
Bank Islam has made very commendable progress over the last few years, under the leadership of its Managing Director, Dato’ Sri Zukri Samat, who has positioned the Bank into a highly-respected Islamic financial institution. Dato’ Sri Zukri’s contributions to the Bank were recognised when he was named the Trailblazer of the Year 2013 by Banking and Payments Asia (“BPA”). BPA also awarded Bank Islam a Special Commendation in the Mobile – Financial Inclusion category for its TAP Mobile Banking-i offering, which is the first mobile banking product that does not require the Internet.
Despite stiff competition among takaful players, Takaful Malaysia pulled in a good performance during the year under review to record a 43% increase in PBZT to RM179.3 million from RM125.5 million in 2012. Operating revenue increased by 6% to RM1.71 billion from RM1.61 billion recorded last year. The improved revenue and profit were largely attributable to higher sales generated by the Family and General Takaful business, better underwriting and investment results and higher net wakalah fee income arising from strong business growth. Takaful Malaysia’s total asset size has increased by 9% to RM6.9 billion. Total profit from investment, comprising realised gains and fair value changes, increased by 7% to RM386.6 million in 2013 as compared to RM362.4 million in the previous financial year.
The Group Family Takaful and General Takaful gross contribution grew by 8% from the previous financial year. Gross contribution from Family Takaful was RM1,052.5 million compared to RM973.0 million in the previous year, while that for General Takaful was RM428.4 million compared to RM401.4 million in 2012.
MORE VIBRANT SECTOR
The takaful sector in general has become more dynamic, with operators offering more innovative products resulting in an upsurge in the take-up of takaful plans, especially by the corporate sector.
However, despite this renewed vibrancy, most of the growth is still within the majority Muslim population, indicating there is a continued need to create awareness of takaful as a viable alternative to conventional insurance. Educating the public on takaful is integral to Takaful Malaysia’s ongoing transformation journey embarked in 2009. This transformation programme has seen the company evolve in a fundamental manner, achieving sustainable top and bottom line growth over the past few years.
A cornerstone of its educational efforts is the ‘We Should Talk’ initiative, inaugurated in April 2012, which reaches outto the mass market, spreading the word on Takaful Malaysia’sunique 15% Cash Back offered on all General Takaful andsome Family Takaful products. In June 2013, Takaful Malaysiaoffered an extra 5% to the existing 15% Cash Back rewardfor non-motor certificates ending in 2013. To promote thisspecial deal, an on-ground ‘We Should Talk’ campaign waslaunched in July, during which over one million flyers weredistributed at high-traffic areas in the Klang Valley. TakafulMalaysia also collaborated with Tesco Stores Malaysia in anadvertising blitz that runs from November 2013 to mid-April2014, during which its Cash Back offer was displayed onTesco trolleys in 14 outlets throughout Malaysia. The objectivewas to increase Takaful Malaysia’s brand presence and topromote the company as a household name and the preferredchoice for protection.
In addition to these initiatives, Takaful Malaysia’s comprehensive strategic planning also focuses on introducing competitively priced products, enhancing operational efficiencies and service delivery, building the company’s human resources, and expanding its distribution capabilities.
In terms of products, the company launched an enhanced version of its investment-linked Takaful myGenLife, designed with elements of extra flexibility for the customers to choose from.
Operations have been enhanced by new technology-driven initiatives. The launch of an e-payment service gives customers greater convenience, while the implementation of an On-Base system which helps to track and interface with Takaful Malaysia’s Customer Relationship Management (CRM) system facilitates the sales and underwriting teams in following proper processes with quotations and proposals. This will assist in the long-term plans to achieve Takaful Malaysia’s targeted Service Level Turnaround Time.
At the same time, efforts to create a performance culture were intensified during the year via training and development programmes aimed at enhancing employee efficiency. Given the rapid growth of the industry and the need for more talent, suitable personnel were recruited. Meanwhile, to retain talent as well as establish itself as an employer of choice, Takaful Malaysia became the first insurance-related company in the country to introduce the Long Term Incentive Plan (LTIP) offering up to 10% of its issued and paid up share capital to eligible employees and Executive Directors.
In a move to further expand its sales and services network, and to provide the best service to its customers, Takaful Malaysia established three new Takaful myCare Centres (“TMCC”) in three different locations and states. In total, there are now 20 TMCCs in Takaful Malaysia’s network.
In recognition of its exemplary performance, Takaful Malaysia was named the Best Takaful Company in Malaysia at the 7th International Takaful Awards held in Cairo. The company was also awarded the Best Performing Stock – Highest Returns to Shareholders over Three Years under the Finance Sector at the Edge Billion Ringgit Club Corporate Awards 2013. These awards represent honour and recognition given to the Management of Takaful Malaysia, led by Dato’ Mohamed Hassan Md. Kamil.
In November, the Securities Commission implemented its revised, and more stringent, screening methodology for Shariah-compliant stocks, which saw 158 stocks from the previous list issued in May 2013 being struck off while 16 new stocks were added. Consequently, a total of 653 securities listed on Bursa Malaysia, or 71% of the total, are now Shariah-compliant as opposed to 88% previously. Investors are given six months until 29 May 2014 to dispose of the Shariah non-compliant securities.
As this revision took place towards year end, it did not have a significant impact on BIMB Securities Sdn. Bhd. (“BIMB Securities”) in 2013. The company achieved an increase of 51% in its value of dealing as compared to 2012. This led to a 54% increase in gross brokerage income to RM12.8 million, and a 48% growth in the total net dealing income from the previous year. The stockbroking group recorded a total income of RM13.2 million, an increase of 22% as compared to the previous year, with a PBZT of RM2 million.
Meanwhile, several technological innovations and improvements were deployed in 2013, including synchronisation of internal systems with Bursa Malaysia’s initiatives on Nominees Rights Subscription (NRS), an electronic Rights processing, and Bursa Trade System 2 (BTS2), Bursa’s latest trading engine which is faster and more efficient. BIMB Securities also deployed trade related systems for institutional clients, to facilitate trade confirmation and to send their orders to BIMB Securities. In addition, BIMB Securities launched the Mobile Trading application for its Internet trading platform, BISonline, on Android and Apple operating systems. This afforded greater convenience to investors who prefer to trade via mobile devices and provided greater reach for BIMB Securities to the investing public.
Syarikat Al-Ijarah Sdn. Bhd. is the Group’s leasing arm. For the financial year ending December 2013, it posted a PBZT of RM0.42 million, which was 12.5% lower than the PBZT of RM0.48 million in 2012. Its Profit After Zakat and Tax, meanwhile, stood at RM0.29 million.
BHB is committed to upholding the highest standards of corporate governance and to maintaining transparent operations, as we believe this is critical in enhancing stakeholder value while building the trust of our consumers. The principles of corporate governance, moreover, reinforce our leadership as the premier Islamic financial services holding company in Malaysia. Corporate Governance at BHB is led by our Board of Directors and is cascaded down to all levels across the Group. In maintaining standards of business integrity, ethics and professionalism, we abide by the Malaysian Code on Corporate Governance as well as other guidelines published by BNM, Bursa Malaysia Securities and the Putrajaya Committee on GLC High Performance.
BHB and our group of companies have been conscious of our responsibility to give back to the community from our very beginnings, given that our business models are based on Islamic principles of ethical banking, insurance and stockbroking. This is reflected in our annual zakat (business tithes) payments as well as in our extensive donations and outreach programmes in which our Management and employees volunteer their time and physical effort to uplift the lives of the underprivileged.
Over and above our contributions to society, all our business operations and dealings are conducted with the highest level of ethics and integrity. We are committed to treating all our shareholders, customers, business partners and employees in a fair, equitable and transparent manner, as we focus on creating mutually beneficial outcomes at all times.
As a caring and responsible corporation, moreover, we are conscious of the need to play our part in protecting and preserving the environment, especially in the current global landscape in which climate change and its consequences present a real and urgent issue. Our efforts to contribute to the Community, Workplace, Marketplace and Environment are described in greater detail in the Corporate Responsibility section of this annual report.
Prospects for the year 2014 look positive as Malaysia’s financial health continues to be bolstered with more projects unfolding under the Government’s Economic Transformation Programme. Economists are forecasting Gross Domestic Product (“GDP”) growth of between 5.0% and 5.5% in 2014 as compared to 4.7% in 2013, indicating a more vibrant economic landscape compared to the year under review.
The country’s strong fundamentals has enabled Malaysia to be ranked 6th place in the World Bank’s Ease of Doing Business Index 2014 which takes into consideration, amongst others, parameters such as credit review, investors’ protection and cross-border trade. In each of these categories, Malaysia was accorded high ratings, reflecting positively on investors’ confidence in the domestic business, regulatory environment and the soundness of the financial services industry.
In addition, initiatives introduced by BNM to curb consumer spending and tighten the property market will stabilise the country’s household debt. Compounded by an expected increase in interest rates and inflationary pressure, this could lead to a contraction in consumer loan demand. However, we foresee this will be counter-balanced by increased private and corporate investments.
For Bank Islam, the implementation of the IFSA will require the Bank to reclassify its deposit and investment accounts. Customers who hold Mudarabah and Wakalah based demand deposits and investment products will have to decide whether to continue with a deposit account, which guarantees the full principal invested; or transfer their funds into an investment account, which carries the risk of conventional investments. Although this may lead to initial increase in costs, the Bank is confident of managing the transition guided by its new three-year corporate strategic plan, H2E, which adopts a multi-pronged approach to further grow its business that focuses on operations, internal resources, geographic expansion and service delivery.
Operationally, Bank Islam has also embarked on a major review of its key end-to-end business processes to increase efficiency and streamline procedures thus ensuring consistent delivery of its brand promise. In terms of building its internal resources, it aspires to become a Knowledge Centre for applied Islamic finance through the establishment of a Shariah Centre of Excellence. This will place Bank Islam in a better strategic position to take its expertise to neighbouring countries. The Bank is always looking for the possibility of foreign expansion based on the growth potential for Islamic banking in the region.
Within the takaful sector, the impending implementation of the Goods and Services Tax (“GST”) is likely to increase the cost of insurance products, hence constrict margins on tariffcontrolled classes, such as motor and fire insurance. Although this would increase competition in the takaful sector, industry players with an edge in the marketplace will be able to find innovative ways to manage their expenses and handle customers’ reaction towards the payment of GST.
In this regard, Takaful Malaysia is confident of continued growth of Islamic insurance in the country. To leverage on this growth, the company will enhance its multi-distribution channels, strengthen its relationship with Islamic bank partners, and double its agency force to 2,500 agents. It will also continue to explore the possibility of expanding to foreign markets.
Liquidity in Malaysia’s equity market has led to a premium market valuation compared to our regional peers. However, with the ongoing QE tapering exercise, we anticipate some outflow of foreign funds. On a positive note, it would also provide the opportunity for domestic retail and corporate investors to restructure their investment portfolios. Leveraging on this, BIMB Securities will play an active role to monitor the market and identify value propositions for our institutional and retail clients.
At BHB, we feel confident of being able to withstand the challenges of a more dynamic global and local economy to take our own journey to the next level.
BHB has come a long way since the challenges faced in FY2006, building on our successive achievements every year to reinforce our foundations. While the organisation itself plays a significant role in our progress, we are also dependent on the support of our stakeholders. And I would like to take this opportunity to thank all our customers, business partners and shareholders for their belief in the Group and invaluable contributions to our growth.
On behalf of the Board of Directors, I would also like to acknowledge our appreciation of the continuous efforts made by the Government and its regulatory bodies – in particular BNM, the Securities Commission and Bursa Malaysia – to promote a healthy Islamic financial environment in the country. BHB and our subsidiaries have been able to flourish because of the conducive ecosystem that has been nurtured over the years.
I would also like to express my sincere appreciation to all my colleagues on the Board of BHB and our subsidiaries for their wise counsel which has helped to keep the Group going even in the most challenging times. At the same time, I speak for my colleagues when I say that we fully acknowledge and appreciate all the hard work and effort of every single employee in the Group. Our journey thus far has been made possible because of you.
Thank you and Wassalam
TAN SRI SAMSUDIN BIN OSMAN