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Letter to Shareholders

Dear Shareholders,

The financial year ended December 2014 presented fresh challenges to financial institutions globally and here in Malaysia, in both the conventional as well as Islamic sectors. Despite these challenges, BIMB Holdings Berhad (“BHB” or “the Group”) continued to grow from strength to strength, backed by steady performances of each of our core subsidiaries. Guided by strong and professional management teams and supported by solid foundations, we have produced another set of very encouraging results to deliver a consolidated operating profit of RM883.6 million, marking an increase of 7.3% from the previous year. Our performance in 2014 befits our leadership as the first and only listed Islamic financial services holding company in the region. It gives me great pleasure to share the highlights of our financial and operational journey over the 12-month period with you.

OPERATING ENVIRONMENT

The global economy picked up to a certain extent in 2014, led by strong performance in the US. This had a positive impact on developing nations, such as Malaysia, which benefited from higher export earnings. Towards the end of the year, greater global volatilities brought about by geopolitical undercurrents in Eastern Europe and the Middle East, a strengthening US economy as well as falling oil prices, led to an outflow of foreign funds. Although the resulting depreciation of the Ringgit impacted businesses with US denominated costs, it was beneficial to exporters.

Coupled with resilient consumer spending and private investment, the country achieved gross domestic product (“GDP”) growth of 6.0%, exceeding the 4.3% recorded in 2013. The outflow of foreign funds led to poor performance by the KLCI, uncertainties in the domestic equities market, and contributed to institutional funds being placed in banks. However, stiff competition for these funds contributed to a higher cost of such deposits. Coupled with lower rates on financing, banking profit margins came under pressure.

Notwithstanding this scenario, Islamic banking continued to be resilient, outperforming the general industry in terms of growth in assets and financing. Over the last four (4) years, the Malaysian Islamic banking industry’s assets have almost doubled, from RM351.2 billion at end 2010 to RM625.2 billion at end 2014, accounting for 25.6% of the domestic banking system’s assets.

Although total financing growth slipped from 17.7% in 2013 to 15.4%, and is expected to continue to moderate in 2015 due to efforts to contain household debt within a more challenging economic environment, it is expected to continue to remain fairly robust in the near future.

As part of its vision to turn Malaysia into a global Islamic financial services hub, the Government had set a target for Islamic banking assets to make up 40% of the banking system’s total by 2020. This is to be achieved by greater diversification of Islamic financing products in order to enhance the sector’s capability to support real economic activity.

These products, however, have to adhere to stipulations of the Islamic Financial Services Act (“IFSA”), introduced on 30 June 2013, which clearly distinguishes between deposits and investment accounts. While Islamic deposits can be withdrawn on demand and are guaranteed by Perbadanan Insurans Deposit Malaysia (“PIDM”), the accounts do not promise any distribution of profits to the account holders. The clients of investment accounts, on the other hand, are able to retain funds for a longer period of time and enjoy the opportunity to earn higher returns subject to more restrictive withdrawal conditions. Investment accounts, without any capital guarantee by PIDM, can be structured with different risk and return profiles based on the characteristics of the underlying assets and the risk appetites of the investors.

Two (2) main types of investment accounts offered by Islamic banks in Malaysia are Restricted Investment Accounts (“RIA”) or Unrestricted Investment Accounts (“URIA”). RIA is an investment account where a specific mandate is given to the bank with regard to the purpose, asset class, economic sector and period of investment whereas URIA allows the bank to make the ultimate investment decision without specifying any particular restriction or condition. For us, the Investment Account Framework is timely as it reflects the concept of Islamic finance which emphasises on risk-sharing, strengthening further the link of finance to the real economy.

Based on the framework, in 2014 the Government announced a Shariah-based Investment Account Platform (“IAP”), expected to be implemented in September 2015. The IAP provides participating banks with the framework to offer investors a wider range of Shariah-compliant investment options with differing risk-return profiles. Capital from these accounts will be directed to diverse forms of funding inclusive of equities-based funding as well as funding of viable ventures. In this manner, IAP will be beneficial both to organisations – generally SMEs – requiring additional funds to support their growth, as well as to investors willing to take the risk related to investing in business ventures to reap the possibility of higher returns from a Shariah-compliant mandate.

Given BHB’s commitment to ensuring the success of all Government initiatives aimed at enhancing Islamic finance, we are proud of the fact that Bank Islam is one of four (4) founding financial institutions to spearhead the IAP. As the Bank’s holding company, BHB will provide all the support needed to nurture the programme, the latest brainchild by Bank Negara Malaysia (“BNM”).

The IAP adds to previous initiatives introduced to spur Islamic finance, such as the Exchange Traded Bond and Sukuk (ETBS); the introduction by the Securities Commission of a framework for socially responsible sukuk instruments; and the requirement that Shariah-compliant counters on Bursa Malaysia Securities Berhad (“Bursa Securities”) have not more than 33% of their cash and debts in conventional accounts.

At a more fundamental level, the Government is strengthening the industry via the creation of a more robust regulatory and supervisory environment. Adding to measures previously announced under the Financial Services Act (FSA)/IFSA which applied to banks and financial institutions, in 2014 BNM widened the scope of the Acts to include financial holding companies (“FHCs”), which have been defined as “apex entities of financial groups which are not persons… and approved by BNM”.

Targeting these FHCs, which include BHB, BNM is developing prudential standards to ensure they are able to meet capital requirements that support risks originating from all entities within the group including those that are unregulated; and to reduce leverage associated with multiple gearing of capital which can overstate a group’s capital strengths and increase contagion risk.

At the same time, BNM is strengthening the governance framework of FHCs by imposing more stringent requirements on independent directors and increasing their representation on the boards of both financial institutions as well as financial groups.

Within the takaful sector, IFSA has called on operators to streamline their family and general businesses by June 2018. Other than IFSA, the takaful sector has been further strengthened by the Risk Based Capital for Takaful (RBCT) Framework, enforced as of 1 January 2014, demanding greater capital adequacy. In essence, both regulations are shaping a more robust takaful industry, which would place takaful providers in a better position to compete with conventional players.

As it stands, the takaful sector in Malaysia is growing at doubledigit rates, far outpacing the conventional sector as more consumers are seeing the value of innovative, value-add Shariah-based takaful products. With stronger governance, takaful operators can expect to create greater churn from the conventional sector to takaful to further accelerate their growth path.

While the IFSA and other regulatory frameworks, including Basel III and the US Government’s recently imposed Foreign Account Tax Compliance Act (FATCA), impose different sets of challenges to local financial institutions, the end result will be a much enhanced financial ecosystem that is transparent, responsible and efficient. Accordingly, BHB and our subsidiaries embrace the opportunity to streamline our operations in line with the emerging frameworks, and look forward to reaping the fruit of our current labour in the near future.

FINANCIAL PERFORMANCE

Despite operating in a more stringent and competitive environment, BHB’s financial performance in 2014 was encouraging. Our total net income grew by 1.3% to RM2.1 billion on the back of strong net financing growth by Bank Islam which cushioned the impact of lower sales generated by our Family Takaful business.

Concerted efforts to increase our cost efficiencies led to BHB’s operating overheads decreasing by 2.9% to RM1.2 billion. This is a notable achievement given that we continued to invest in our talent and capital expenditure to support business franchise growth. I am further pleased to share that our prudent and diligent management of operating overheads saw our cost to net income ratio improve from 59.3% to 56.8%.

The respectable performance of our banking and takaful businesses combined to produce a consolidated operating profit of RM883.6 million which, as mentioned earlier, was a 7.3% or RM60.5 million increase from the RM823.1 million recorded in 2013.

Our consolidated profit before zakat and taxation (“PBZT”), however, was marginally lower at RM815.4 million, compared with RM819.4 million in 2013. This was due to the higher cost of financing for our sukuk of RM68.2 million as opposed to RM3.3 million in 2013. The sukuk was raised to fund the acquisition of Bank Islam shares in 2013. The acquisition meant greater recognition of Bank Islam’s profits in our statement of accounts, leading to a significant 90.6% increase (of RM253.0 million) in our net profit attributable to shareholders for the year under review. Consequently, our earnings per share (EPS) also rose by 37.9% to 35.64 sen per share, from 25.84 sen per share in the previous year.

BHB’s asset quality improved further, with our gross impaired financing ratio decreasing by four (4) basis points to 1.14% from end December 2013 to end December 2014. This was due to Bank Islam’s prudent credit underwriting standards and aggressive collection efforts.

At the same time, the Group’s capital position remained healthy, above BNM’s minimum requirements, with Common Equity Tier 1, Tier 1 and Total CAR at 12.2%, 12.2% and 13.4% as at 31 December 2014 respectively.

Given our performance, on 25 November 2014, the Group declared an interim single-tier dividend of 14.7 sen per share, amounting to RM219.5 million, or 172.8% of our net profit for the financial year. Upon its payout on 13 January 2015, 82.3% or RM180.6 million was reinvested by shareholders in 48,703,800 new ordinary shares of RM1.00 each at RM3.71 per share via our inaugural Dividend Reinvestment Plan (DRP).

BANK ISLAM

Bank Islam is the country’s first Shariah-based bank and the first Islamic bank to be established in the region. It continues to be the symbol of Islamic banking in the country, leading the way in introducing innovative products and solutions as it pursues its vision to become a “global leader in Islamic banking”. In 2013, BHB acquired 49% equity of Bank Islam that had previously been owned by Lembaga Tabung Haji and Dubai Financial Group, following which the Bank has become a 100% owned BHB subsidiary. It contributes to about 80% of the Group’s profits.

Financial Performance

As a result of concerted efforts to grow the business, Bank Islam recorded a PBZT of RM702.1 million, which was 3.8% higher than was achieved for the financial year 2013. Its net financing assets grew by 24.4% to RM29.5 billion as at end December 2014, accompanied by a 17.3% increase in fund-based income from financing of RM234.7 million. At the same time, foreign exchange transactions and net gain from the sale of financial assets availablefor sale contributed to a 2.9%, or RM8.4 million, increase in nonfund based income.

Bank Islam ended the year with a RM3.8 billion increase in customer deposits, marking a 10.1% growth to total RM41.0 billion. Its current and savings accounts (“CASA”), meanwhile, grew by 7.3%, or by RM1.1 billion, leading to a CASA ratio at end December 2014 of 38.1%, surpassing that of the Islamic banking industry in general in the country, which stood at 24.8%.

Continued focus on asset quality saw the Bank’s gross impaired financing ratio at year end further improve to 1.14% from 1.18% a year ago, while its net impaired financing ratio stood at -0.82%. Both metrics surpass those of the banking system, which experienced a 1.66% gross impaired ratio and -0.11% net impaired ratio as at year end.

In fact, I am proud to note, some of the Bank’s key performance indicators for the year 2014 measure favourably against those of the banking system. Its pre-tax return on equity was 19.9% against the banking system’s 15.2%; and pre-tax return on assets was 1.6% against 1.5%.

Redefining Products, Building Capital

Bank Islam was the first bank in Malaysia to introduce chip-based ATM cards; the first to launch mobile banking service without Internet access; and the first to launch floating rates for personal financing, among others. Continuing with this string of pioneering activity, in 2014 it introduced yet another first for the country – the very first Restricted Investment Account under IFSA 2013 called Al- Ansar.

Following the Budget 2015 announcement that Lembaga Tabung Haji would allocate RM200 million towards financing Bumiputra entrepreneurs and SMEs, the Bank made the necessary investments in its IT infrastructure to support the new product, and set up a dedicated team to market it. The result is the Shariah-compliant Al-Ansar, which was approved by BNM in early March 2015, and was launched on 2 April 2015 by the Prime Minister of Malaysia, YAB Dato’ Sri Mohd. Najib Tun Abdul Razak. Alhamdulillah, we are very proud of Al-Ansar as it is the brandchild of Bank Islam and the first of its kind in Malaysia.

In offering financing to recipients, the Bank will be guided by a specific mandate with regard to the purpose, asset class, economic sector and period of investment as specified by Lembaga Tabung Haji. Al-Ansar will be made available until 31 December 2020. The Bank also received approval from BNM to issue a Subordinated Sukuk Murabahah Programme (sukuk) valued up to RM1 billion with a tenure of 30 years from the date of first issuance. Proceeds from the sukuk will be used to enhance the Bank’s capital adequacy ratio to support more robust organic growth. The first tranche of the programme, amounting to RM300 million, was launched in April 2015 and was subscribed RM100 million each by Tabung Haji, EPF and KWAP.

The Bank continued to make steady progress on each of the six pillars of its Hijrah to Excellence (“H2E”) transformation programme, namely: Robust Organic Growth, Service Excellence, Shariah-led Innovation, Resource Optimisation, Employee of Choice and Regionalisation. Its Organic Growth is reflected in the Bank’s sound financial performance. This, in turn has been supported by the other pillars of the H2E programme.

Towards Service Excellence, the Bank has been leveraging on greater use of technology to increase its efficiencies and service delivery. Further enhancing its service culture, various initiatives have been implemented to instil a customer-centric mindset among employees, and especially frontliners who deal directly with the Bank’s retail and corporate clients. All frontline staff are required to attend Service Excellence Training which reinforces the importance of delivering superior service.

These efforts have not been in vain. During the year, the Bank was named the Most Outstanding Retail Bank at the Kuala Lumpur Islamic Finance Forum (KLIFF) 2014. It also won the International Banker’s Best Customer Services Provider 2014 for Malaysia award in United Kingdom.

In terms of Shariah-led innovation, Bank Islam continued to develop more products and solutions not only for customers but also for the industry. To remain competitive in the market, it launched the Term Deposit-i (Tawarruq) [TDT-i], a PIDM guaranteed deposit account, offering the flexibility of managing funds according to short or long-term needs.

It also launched a number of debit cards – the MyAngkasa Membership Card for members of the National Cooperative Body of Malaysia (ANGKASA); the co-branded Bank Islam Team Harimau Visa Debit Card-i for Harimau Malaysia football fans; and another University Debit Card-i (UniDebit), this time for students at Universiti Malaysia Pahang (UMP).

Meanwhile, its wholly-owned subsidiary BIMB Investment Management Berhad launched the BIMB i Flexi Fund, a Shariahcompliant mixed asset fund structured to offer investors long-term capital appreciation.

By virtue of Resource Optimisation, the Bank intends to cross sell and upsell its products; further improve its systems and processes; as well as create greater cost efficiencies and productivity. Among the key achievements within this pillar was reducing the waiting time of walk-in customers at Bank Islam branches. During the year, 94% of the branches have achieved their minimum waiting time of five (5) minutes or less.

Finally, within a fast growing and competitive niche sector such as Islamic banking, it is only to be expected that there will be a war for talent. Bank Islam’s strategic response to this is to establish itself as an Employer of Choice, offering employees a stimulating work environment that inspires and rewards excellence while caring for employees’ well-being. In addition to identifying and developing leaders, the Bank encourages greater engagement across all levels via a culture of sharing and respect.

Syukur Alhamdulillah, Bank Islam was voted the 16 most popular employer in the 100 Leading Graduate Employers Poll conducted by GTI Media and powered by the trendence Graduate Barometer, up from 51 in 2013. Even better, the Bank was rated among the top three (3) employers in the Banking and Financial Services sector by the same survey. One of the Bank’s talents, Ustaz Mohd Nazri Chik meanwhile did us proud by being named the most Promising Young Banker by The Asian Banker Awards 2014; while the Bank’s MD Dato’ Sri Zukri bin Samat – who is now also our Group CEO – added to his list of accolades by being awarded the Banking CEO of the Year – Asia by International Banker Awards 2014 held in London, United Kingdom.

TAKAFUL MALAYSIA

Takaful Malaysia was the first Islamic insurance provider to be set up in the country and is today the market leader in the Family Takaful segment, with particular strengths in Employee Benefit and Bancatakaful protection solutions. Takaful Malaysia stands out in the marketplace for its 15% Cash Back to General Takaful customers for no claims made during their year of coverage.

Financial Performance

Amid a challenging environment that included curbs on personal loans, Takaful Malaysia continued to focus on prudent underwriting, tighter management expenses control and proactive investment management to deliver another set of respectable financial figures. Although the year saw its operating revenue decline by 3.5% to RM1.65 billion, Takaful Malaysia’s PBZT increased by 4% from RM179.3 million in 2013 to RM186.7 million. Its profit after tax and zakat (PATZ) grew by 3%, to RM138.7 million from RM134.4 million. This was largely attributable to lower management expenses.

The total asset size increased by 4% to RM7.2 billion, supported by enhanced underwriting for mortgages and General Takaful products. These cushioned the RM244 million drop in take-up of group credit products following the implementation of BNM’s more stringent personal financing rules, which led to a decrease in total gross contribution by 5% to RM1.41 billion.

Segment-wise, General Takaful’s gross contribution grew 5% from 2013 to close at RM451.3 million, while gross contribution from Family Takaful decreased by 9% to RM958.1 million as a result of a significant drop in group credit products.

I am pleased to share that Takaful Malaysia was able to complement its sound underwriting performance with equally impressive investment results despite the challenging 2014 investment environment. There were significant shifts in the global financial market landscape where the economic growth of many countries in Asia grew at a more subdued pace. Locally, the financial market also registered a lower growth than anticipated. Nonetheless, maintaining a cautious approach, particularly for equities and sukuk, and greater focus on portfolio diversification, the Company delivered a sustainable five-year average investment yield of more than 6% per annum.

Innovating on Products, Building the Brand During the year, Takaful Malaysia maintained its edge by meeting customers’ needs with innovative products, and focusing on excellent service delivery. In addition, it enhanced its infrastructure and operations, grew its network, empowered its agency force and established strategic partnerships with corporate clients and bank partners. These, coupled with more aggressive marketing and branding campaigns, helped Takaful Malaysia to further expand its market share.

The most significant product launch was that of the Takaful myHealth Protector, an innovative approach to healthcare offering an attractive range of in- and out-patient benefits and a choice of eight (8) medical plans at affordable premiums. The product also increases the maximum entry age to 70 years, enabling those who are healthy and without medical coverage to be insured. As an added value proposition, Takaful myHealth Protector extends Takaful Malaysia’s 15% Cash Back promise to its health care plan participants.

A key differentiator of Takaful Malaysia is its Cash Back offerings. In its campaigns, therefore, Takaful Malaysia places much emphasis on driving greater awareness of the unrivalled value it offers customers.

Takaful Malaysia’s “No Claims? Get 15% Cash Back For Motor Insurance” outdoor advertising campaign was a case in point. This was complemented by advertising via other channels and through strategic partnerships to strengthen the Takaful Malaysia image, and educate the non-Muslim market segment of the relevance of its products in meeting their needs. In its point-of-purchase advertising for Motor Takaful, Takaful Malaysia made the most of the opportunity to introduce consumers to its extensive range of products, and to engage specifically with potential non-Muslim customers.

Takaful Malaysia also took its advertising collaboration with Tesco Stores Malaysia one step further. From conventional advertising posters, it launched into full-wall wraps covering every inch of the side walls of the travellator walkaway at 15 Tesco outlets throughout Malaysia. This advertising blitz will run for one year from June 2014.

Targeting corporate customers, and especially those who have subscribed to its Employee Benefits protection plans, Takaful Malaysia launched the Takaful myCorporate portal as an online one-stop centre. With just a few clicks of the button, corporate customers can update information on their employees and these will be incorporated instantly for immediate coverage. The portal also enables clients to access all information relating to their companies’ takaful insurance packages and certificates.

Further improving customer access to its services, Takaful Malaysia opened its third Takaful Retail Centre at the Lembaga Tabung Haji Islamic Financial Service Centre (“IFiC”) at Jalan Tun Razak, Kuala Lumpur. Takaful Malaysia was inspired by the one-stop centre concept of IFiC to convert its existing Takaful myDesk at Lembaga Tabung Haji’s headquarters into a Takaful Retail Centre. The Takaful Retail Centre will not only function as a collection centre for both General and Family products but will also act as a servicing centre to assist customers in their certificate servicing and claim submissions.

Internally, Takaful Malaysia continued to stay lean and agile in its operations to deliver lasting reserves and sustainable organisational efficiencies. Leveraging on enhanced systems and processes, it managed to reduce costs and its inventory as it further grew its business.

Takaful Malaysia has consistently been recognised for its high level of operational effectiveness and the trust it engenders from customers. For three (3) consecutive years at the International Takaful Awards, Takaful Malaysia won the title of the Best Takaful Company in Malaysia in recognition of the superior quality of its wide range of solutions to meet customer’s needs.

Takaful Malaysia was also a top-three winner in three (3) categories of The Edge Billion Ringgit Club Corporate Awards 2014. The company clinched second place for the Best Performing Stock - Highest Returns to Shareholders Over three (3) Years; third place for the Most Profitable Company - Highest Return on Equity Over three (3) Years; and third place for the Highest Profit Growth Company - Highest Compound Growth in Profit Before Tax Over three (3) Years.

BIMB SECURITIES

It was a challenging year for investors, especially the fourth quarter. Foreign funds selling coupled with battering of the oil and gas sector were main reasons for the roller coaster ride. For the year, the FBMKLCI lost 5.66% as opposed to the Emas Shariah Index which declined by 4.17%. The below expectation performance was attributed to a massive outflow of foreign funds totalling RM6.9 billion for the year from a net inflow of RM3.1 billion in 2013.

Nevertheless, market volatility increased the value of dealing and brokerage income at BIMB Securities Sdn Bhd (“BIMB Securities”) in 2014. The company achieved an increase of 18% in value of dealing compared with 2013. This also led to a 16% increase in gross brokerage income to RM14.904 million compared with RM12.794 million in 2013, and a 13% growth in the total net dealing income from the previous year. The stockbroking group (including Nominees companies) recorded a total income of RM14.5 million, an increase of 10% compared with the previous year, but with a lower PBZT of RM0.6 million. Other investments yielded lower returns compared with the previous year, thus contribution to the profit was much lower.

The Company also rolled out several technological initiatives in 2014, such as the Intranet and Document Management System, for greater work efficiency and to reduce paper use. In addition, eBroking initiatives were deployed whereby share margin clients are now able to trade via the online trading system. ePayment via www.bankislam.com.my and www.Maybank2u.com.my were also introduced, allowing clients to pay BIMB Securities via the banking internet portal. Further initiatives with Bursa Securities were also made during the year, such as the trade confirmation messages sent via Dropcopy FIX connection files and the introduction of BursaMktPlc (http://www.bursamarketplace.com), a platform created by Bursa Securities for the public to interact with Opinion Leaders at the different stockbroking companies.

SYARIKAT AL-IJARAH

Syarikat Al-Ijarah Sdn Bhd is the Group‘s leasing arm. For the financial year ending December 2014, it posted a PBZT of RM0.35 million, which was 16.7% lower than the PBZT of RM0.42 million in 2013.

CORPORATE GOVERNANCE

The Board of Directors of BHB has always maintained the highest level of corporate governance to ensure the integrity and transparency of our operations. Our corporate governance framework is guided by the Malaysian Code on Corporate Governance (MCCG) 2012 and is constantly updated to reflect changes in the regulatory environment.

In line with the IFSA and its requirement for Islamic financial holding companies to have greater oversight and control over the activities of the companies within its fold, BHB has enhanced our governance structure by establishing at the Board level, a new Group Board Risk Committee, whilst at the management level, a new Group Management Committee and Group Enterprise Risk Management Committee which will be implemented in FY2015.

These Committees will meet regularly to discuss strategic issues within the Group, thus ensuring BHB not only meets the regulatory requirements but also maintains the highest standards in our internal control, effective capital and risk management, create business synergies within and drive the business objectives of the Group.

Our new governance structure underlines the Group’s commitment to strengthening the Islamic financial services industry in the country, aiding in the establishment of Malaysia as a regional Islamic financial hub. In the process, we will also elevate BHB as the premier Shariah-compliant financial services group in the country.

CORPORATE RESPONSIBILITY

As a responsible Islamic organisation, BHB makes regular zakat (business tithes) payments to the Islamic authorities in the different states. In 2014, in addition to paying zakat, Bank Islam developed new zakat computation guidelines for the industry, making it easier for us and all Islamic corporations to perform their duty. Over and above zakat contributions, we play an active role in the communities where we have a presence by contributing to the social and economic well-being of those who are underprivileged or marginalised.

Through our subsidiaries, we have “adopted” a couple of orphanages and contribute to their administration. In addition, our employees dedicate their own personal time to spend with the children, especially during festive occasions such as Aidilfitri. Our contributions to society are not confined to Malaysian shores, but have been extended to those in need overseas. Over the past few years, we have been supporting the Palestinian cause via a variety of channels.

Although our industry does not contribute significantly to climate change, we take our responsibility to protecting the natural environment seriously. Towards this end, we have been educating children about the importance of environmental conservation while actively participating in various activities – such as rehabilitating mangrove forests – that directly enhance our ecosystem and safeguard the environment for future generations.

OUTLOOK

A much repeated sentiment within the corporate realm today is that only one thing is certain, namely uncertainty. This seems to accurately describe the global environment, which has been extremely volatile over the last few years, and shows no sign of settling into any predictable pattern.

As the US economy continues to surge forward, much of Europe and other economic powerhouses such as Japan and, to some extent China, are still grappling to fend off deflationary pressures. This has led to a slew of monetary easing measures, with a number of central banks launching into quantitative easing (“QE”) programmes to resuscitate demand. In Malaysia, to consolidate its fiscal health, the Government has revised allocations for various sectors under Budget 2015 in anticipation of a challenging environment exacerbated by low oil prices. Consequently, fiscal deficit is projected to reach 3.2% of GDP from the initial estimate of 3.0%. In the same vein, GDP growth forecast in 2015 was lowered to 4.5% and 5.5% from 5.0% and 6.0% previously.

At BHB, we expect the challenging financial landscape to further narrow the net income margin. Exacerbating the situation, the Goods and Services Tax (“GST”) implemented on 1 April 2015, is likely to increase banking and takaful costs to a certain extent. Although the GST is widely thought to increase inflation, at least in the initial stages, the continued decline in commodity and oil prices will keep the consumer price index in check.

Demand for financing has been decreasing gradually, and could continue into 2015. With innovative and attractive financing products, however, Bank Islam is confident of being able to shore up its financing portfolio. This will be complemented by targeted efforts to increase the Bank’s deposits as well as investment accounts. As the Bank continues with its H2E programme, it will further strengthen its fundamentals and be better positioned to create greater demand for Islamic banking, as well as to capitalise on opportunities that will arise from a supportive and vibrant ecosystem.

Takaful Malaysia will maintain an active management strategy coupled with prudent underwriting and investment activities. In anticipation of more corporations and multinationals entering the takaful market, it will enhance its focus on innovative and customer-centric products, and its culture of customer service excellence. It will also reinforce its brand name and reputation via strategic marketing campaigns that drive home its unique 15% Cash Back proposition.

Building on its multi-channel distribution network, it aims to outpace the market and firmly establish itself as the preferred choice not just among takaful companies but all conventional insurance providers. An area of focus will be Islamic financing products. As Shariah-compliant financing gains traction in the market, there will be a greater need for takaful as a valid risk transfer mechanism, and Takaful Malaysia intends to fully explore the potential of this niche. We expect the local equity market to continue to be challenging as a result of dampened sentiments from the outflow of foreign funds and massive sell-down in the oil and gas sector. At the same time, given the market’s current valuation, and Japan’s commitment to heightened QE, the local bourse will be well supported by domestic liquidity. The global financial system, too, will be flushed with liquidity from the cautionary monetary policies of most central banks that have been pushing down interest rates as a means of encouraging growth. Overall, the outlook for stockbroking in 2015 will be reflective of the year 2014. Barring any unforeseen circumstances, there may be a slight rebound in the market which may improve the situation towards the second half of 2015.

ACKNOWLEDGEMENTS

BHB is at a very exciting phase of our journey, in which we are both shaping as well as being shaped by various forces that are promoting a more transparent, efficient and sustainable Islamic financial system. Our successes to date are the culmination of the contributions of various stakeholders, from our parent organisation to our subsidiaries, our business partners and customers, all of whom I would like to acknowledge.

Of special note, I would like to thank the regulators – namely BNM, Bursa Securities and the Minority Shareholder Watchdog Group (MSWG), among others – as well as analysts, fund managers and members of the media, for their support. To our highly valued shareholders, thank you for your belief in our ability to deliver and for your active participation at our Annual General Meeting.

I would also like to express my deepest appreciation to members of the Board of Directors of BHB as well as of our subsidiary companies for their wise counsel which has helped the Group maintain our steady momentum of growth.

On behalf of the Board of Directors, meanwhile, I would like to take this opportunity to extend our gratitude to the Management of BHB for its leadership. In particular, we would like to thank our former Group Managing Director/Chief Executive Officer, Dato’ Johan bin Abdullah, who has steered BHB Group so ably for the last seven (7) years. Dato’ Johan has recently been appointed as Deputy Group Managing Director and Chief Executive Officer of Lembaga Tabung Haji and we wish him all the best in his future undertakings. Meanwhile, we welcome on board our new Group Chief Executive Officer, Dato’ Sri Zukri bin Samat who is also the Managing Director of Bank Islam. With his extensive experience in the Islamic banking and financial industry, we have every confidence of Dato’ Sri Zukri guiding BHB Group to the next phase of its ongoing exciting journey.

As for our employees, I speak for the Board when I say that we truly appreciate your commitment to the Group, and your passion to see us achieve our shared vision and goals. Keep up the excellent work, and BHB will certainly continue to Lead the Way in Islamic Financial Excellence.

Thank you.
Tan Sri Samsudin bin Osman
Chairman