On behalf of the Board of Directors, I am pleased to present the Annual Report and Audited Financial Statements of Hong Leong Capital Berhad (“HLCB” or “the Group”) for the financial year ended 30 June 2022 (“FY2022”).
Our Business Environment
In the first half of the year under review (FY2022), the global economic recovery progressed at a divergent pace, as advanced economies’ recovery continued amid higher COVID-19 vaccination rates while emerging market economies experienced slower growth due to containment measures to curb new strains of the COVID-19 virus. Malaysia faced a resurgence of the pandemic and had to reintroduce social mobility restrictions periodically. Nevertheless, as the pandemic’s severity started to ease, our business environment gradually improved with the nation’s progression towards less stringent phases of the National Recovery Plan, allowing for the resumption of most economic activities and the removal of interstate mobility restrictions.
In the second half of the year under review (FY2022), the global economy was confronted with renewed difficulties. Geopolitical tensions escalated between Russia and Ukraine resulting in a military conflict that further intensified pre-existing strains to global supply chains and spikes in food and energy prices. To address the persistent and rising inflationary pressures, central banks around the world began to remove monetary policy accommodation at a quicker pace, risking a sharper slowdown in global growth. In Malaysia, notwithstanding the rising external headwinds, domestic growth prospects have improved following the nation’s transition to endemicity, and reopening of international borders. Consequently, as Malaysia’s recovery gained a stronger footing, Bank Negara Malaysia began to normalise monetary conditions by raising the Overnight Policy Rate by 25 basis points in May 2022 to 2.00% from the record low rate of 1.75%.
The Malaysian bond market continued to attract net inflows of RM8.0 billion in the first half of FY2022. However, net outflows of RM1.9 billion were recorded during the second half of FY2022 as foreign investors retreated to advanced economies like the United States in search of higher yields following the Federal Reserve’s increasingly aggressive policy stance on combatting rising inflation.
The Malaysian stock market, as referenced by the FTSE Bursa Malaysia Kuala Lumpur Composite Index (“KLCI”), ended the first half of FY2022 at 1,568 points, an increase of 35 points or 2.3% from the start of our financial year. This was driven by a strong surge in Malaysia’s COVID-19 vaccination rate which aided the country’s reopening momentum as it progressed through less restrictive phases of the National Recovery Plan. Although local institutional investors were net sellers to the tune of RM4.7 billion during this period, domestic retail investors remained net buyers purchasing RM3.5 billion, alongside foreign investors’ purchases of RM1.2 billion. However, the positive momentum in the market did not sustain in the second half of FY2022 due to external headwinds stemming from the Russia- Ukraine armed conflict, COVID-19 virus containment measures in parts of China and tightening monetary policy stance globally. The weaker investor sentiment was further exacerbated by domestic concerns over cost-push inflationary pressures and a foreign workers shortage situation. Consequently, the KLCI declined by 123 points or -7.9% during the second half of FY2022.
Review of the Year's Financial Performance
The Group ended the financial year with Profit before Tax (“PBT”) of RM97.2 million in FY2022, a decrease of 45.2% year-on-year (“y-o-y”). Our Stockbroking business navigated through a very challenging year and recorded a lower net brokerage income of RM67.2 million for FY2022 in line with Bursa Malaysia’s decline in market volumes by 46.7% versus previous year. The decrease of retail participation during the financial year has also led to lower market share during this period impacting the overall financial performance of our Stockbroking business.
Our Investment Banking business achieved revenue of RM68.2 million and a PBT of RM29.7 million in FY2022. Our Treasury & Markets division remained as the main revenue contributor to the Investment Banking business with 58.2% revenue contribution in FY2022. The team’s continuous active management of the bond portfolio resulted in the commendable performance. The team will be focusing on seeking investment opportunities in Environmental, Social and Governance (“ESG”) and/or green bonds such as for solar and hydro plants in the coming year.
The Equity Markets division benefitted from the active IPO activities and staged a healthy recovery with y-o-y revenue growth of 47.9%. The number of IPO listings for the second half of FY2022 increased as the country’s economy gradually recovers from the transition of pandemic to endemicity. The team has been actively seeking and pursuing a more diverse range of corporate mandate opportunities to diversify the income contribution mix under current market conditions.
Our Debt Markets division’s performance was affected by a lower revenue of 60.1% y-o-y reduction in FY2022 caused by lower market activity and delays in the completion of some mandated deals within the current financial year caused by disruptions from the earlier pandemic movement restrictions. Nevertheless, our Debt Markets division received seven awards in FY2022, which is a testimony of our strong market share of available deals in the Debt Markets space. The team will continue to provide innovative solutions to assist our clients in achieving their business objectives and are seeking opportunities to collaborate with clients in accelerating their transition towards sustainable practices given the increasing demand from investors for ESG and sustainable investments or products.
The fund management business of HLCB, undertaken via our subsidiary, Hong Leong Asset Management Bhd (“HLAM”) and its subsidiary, Hong Leong Islamic Asset Management Sdn Bhd (“HLISAM”) recorded a PBT of RM25.2 million for FY2022, a marginal growth of 1.8% y-o-y. The performance is attributed to the increased net fee income earned from equity funds and fixed income funds with higher average Assets Under Management (“AUM”). However, the better fee performance was offset by weaker income contribution from the money market funds as the average AUM was negatively impacted by withdrawals due to the removal of tax exemption on the distribution of interest income to non-individual unit holders effective 1 January 2022. In FY2022, HLAM continued to deliver impressive fund performance by winning 20 individual Refinitiv Lipper Fund Awards for Malaysia Universe and Global Islamic. The team also won the highly coveted Best Equity Group - Malaysia Provident award. In order to further build and diversify the AUM base, the team will continue to work closely with our distributors and clients as well as exploring possible business expansion by leveraging on Hong Leong Group of companies’ resources.
The rising external headwinds and fragile macro-economic environment remain a risk to the Group and we shall remain vigilant in managing our key business risks. The Group’s balance sheet and risk metrics remained strong and is supported by solid and healthy asset quality. Our capital is adequate and we have ample liquidity to support and execute the Group’s business needs. The total capital ratio of our key operating subsidiary, Hong Leong Investment Bank Berhad, remained healthy at 46.36% as at 30 June 2022.
In view of the weaker performance and to remain prudent as we confront an uncertain economic outlook in FY2023, the Group is recommending a final dividend of 19.0 sen per share for FY2022, representing a dividend yield of 3.4% as at 30 June 2022.
HLCB is committed to a high standard of governance, professionalism, ethics and integrity in the conduct of our business and activities. We focus on building a strong culture of compliance and integrity in our business conduct through the adoption of best practices to enhance accountability, transparency and long-term sustainability of our business.
Our corporate culture is grounded in ethical business principles and we have a zero-tolerance position on bribery and corruption. The Board has put in place a corporate governance framework to perform its oversight roles and responsibilities effectively. The Board Audit and Risk Management Committee (“BARMC”) oversee the affairs relating to risk management, compliance and internal controls.
We have in place group-wide policies and procedures which include the Board Charter, Code of Conduct and Ethics, Anti-Bribery and Corruption Policy (“ABC”), Gifts and Entertainment Policy and Whistleblowing Policy, which are reviewed annually. Policy principles are communicated group-wide and all employees attest to key policies such as Code of Conduct & Ethics and ABC Policy. Monitoring of internal compliance controls was conducted by the Compliance function, and results of such compliance reviews were reported to BARMC for assessment. To enhance our corporate governance culture and awareness, in-house and external training sessions on ABC, Anti-Money Laundering/Counter Financing of Terrorism and ESG were organised for directors and employees.
At the core of everything we do, we are guided by our principles to make the right decisions that will hold us in good stead today and in the future, improving the well-being of our people, our communities and the environment that we live in. It is imperative that we embrace these sustainable principles and approach them in a strategic manner to realise long-term shareholder value while taking into account the interest of all other stakeholders. The pandemic and events linked to climate change has brought about the increased focus on the importance of sustainable business endeavours.
In 2021, the Government of Malaysia announced the goal of reaching net zero emissions by 2050 in the Twelfth Malaysia Plan and committed that Malaysia would not be building any new coal power plants, strive to expand electric vehicle infrastructure and introduce a blue economic blueprint for coastal development. HLCB is committed on its efforts to slow global warming and avert the broader environmental degradation caused by climate change. In FY2022, HLCB has started to measure and monitor the Greenhouse Gas (“GHG”) emissions for the Group.
Last year, the Group has taken actions to integrate sustainability issues into our business activities whilst our Asset Managers have embedded the principle of impact investing into the fund management and investment approach. This year, the Group has completed developing our Sustainability Framework which is guided by four central pillars, namely Engaging on Sustainability, Addressing Climate Change, Strengthening Internal Capabilities and Impactful Digitalisation. The Sustainability Framework will be used as a foundation and guide to HLCB in embedding sustainability in the Group’s strategies with the objective of delivering sustainability-linked value to stakeholders.
In October 2021, HLAM and HLISAM have also developed and formalised an ESG Framework into their investment policy, where ESG considerations are embedded into the investment philosophy and processes. The systematic inclusion of ESG risks and opportunities into the investment analysis will drive deeper insights into value creation going forward. HLAM has also launched its first ESG fund, the Hong Leong Global ESG Fund (“HLGESGF") on 20 April 2022. The HLGESGF aims to provide medium- to long- term capital growth by investing in a globally diversified portfolio of companies with a focus on ESG criteria in the investment process. Our Investment Banking team will also be looking for ways to partner with clients in accelerating their transition towards sustainable practices.
At the time of writing, we expect macro-economic conditions to remain challenging and markets to remain volatile in FY2023 with global interest rates likely to trend higher and no likely near term resolution to the Russia- Ukraine conflict. While the Malaysian economy is expected to stay on a growth trajectory, we remain cautious on the business environment as we foresee the growth momentum moderating by the second half of FY2023 amid rising external headwinds.
Cognizant of the more challenging operating environment, we will look to calibrate our business strategies and adapt as necessary to changing circumstances while ensuring prudence as we look to deliver sustainable business performance and long term value for all stakeholders. We will invest in, emphasize and harness more digital solutions to our clients in order to deliver better client experience while better managing cost efficiency and operational productivity.
Additionally, with increasing demand from regulators and stakeholders for organisations to increase focus on sustainable business undertakings, we will commit to observe the strictest governance and integrity in the way we conduct our business. We are committed to maintain a diverse and inclusive workforce; and accelerate our efforts to assess and integrate ESG risks and opportunities in executing our business and strategies, guided by our Sustainability Framework. That, we believe will be a meaningful way to deliver long-term sustainable growth for the Group.
I would like to take this opportunity to express my appreciation and gratitude to the Board of Directors, management and our employees for their dedication and commitment.
My sincere appreciation also goes to our regulators, shareholders, clients, business partners and all other stakeholders. Thank you for your support and we appreciate your continuous support as we look forward to a year of growth for the Group.