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Quarterly Report For The Financial Period Ended 31 December 2017

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Unaudited Consolidated Statements Of Comprehensive Income

Income Statement

The interim financial statements should be read in conjunction with the audited financial statements for the year ended 31 December 2016.

Unaudited Consolidated Statement Of Financial Position

Balance Sheets

The interim financial statements should be read in conjunction with the audited financial statements for the year ended 31 December 2016.

Performance Review

Current Year-to-Date vs Previous Year-to-Date
Income Statement

Group revenue for the 12 months ended 31 December 2017 of RM3.260 billion is at par with the revenue recorded for the previous financial year. Group profit before tax for the financial year ended 31 December 2017 of RM550.732 million increased by RM212.311 million or 62.74% as compared to the previous year profit before tax of RM338.421 million. The increase was mainly due to higher net operating income and lower allowances for impairment losses on loans, advances and financing. Net profit attributable to ordinary equity holders stood at RM417.126 million, higher by 107.10% over the preceding year net profit of RM201.412 million.

The Group cost to income ratio slightly increased from the previous year ratio of 20.8% to stand at 22.6% in the current year. Total personnel expenses for the financial year ended 31 December 2017 of RM161.65 million were higher by RM28.86 million or 21.7% as compared to the previous year corresponding period mainly due to higher wages and salaries expenses as total number of staff increased from 1,477 to 1,565. Finance costs for the financial period ended 31 December 2017 of RM149.57 million were lower by RM43.03 million or 22.34% as compared to the previous year corresponding period mainly due to lower cost of deposits.

The Group embarked on a "Closing the Gaps" exercise since 2010 to bridge its frameworks to be in line with banking standards and best practices. Following the completion of the impairment programme, which is in line with the recommendation by Bank Negara Malaysia and in compliance with current accounting standards, allowances for impairment losses on loans, advances and financing increased by RM1.98 billion cumulatively since fourth quarter of 2014. The Group financing and loan loss coverage ratio increased to 139.52% for the financial year ended 31 December 2017 from 107.09% recorded over the same period last year.

The Group’s gross loans and financing contracted to RM34.201 billion or -3.07% as at 31 December 2017, from RM35.285 billion as at 31 December 2016. This was mainly due to reclassification of selected impaired retail loans and financing accounts totalling RM1.510 billion to financial assets held-for-sale. This was partly off-set by growth in corporate loans and financing. Fair value of financial investments available-for-sale increased by RM807.163 million as compared to 31 December 2016 position due to improved yields from favourable market sentiments. Total deposits from customers increased by RM2.144 billion or 7.0% to stand at RM32.755 billion as at 31 December 2017.

The performance of the respective operating business segments for the current period under review as compared to the previous year corresponding period is analysed as follows:

Personal financing – The gross income from personal financing in the current period was lower compared to the previous year corresponding period due to lower disbursements and decreasing portfolio base. The lower disbursements are part of the overall product mix strategy between retail and corporate portfolios, and to strengthen the personal financing portfolio quality.

Corporate loans and financing – The gross income from corporate loans and financing in the current period was higher compared to the previous year corresponding period due to the continued growth of corporate loans and financing assets base.

Property financing and Mortgage loans – The gross income from property financing was higher in the current period compared to the previous corresponding period due to growth in its financing assets base. This was partly set off by lower income from mortgage loans as its assets base decrease due to declining disbursements.

Auto financing – The gross income from auto financing was lower compared to the previous year corresponding period due decreasing portfolio base.

Current Quarter vs Previous Year Corresponding Quarter

The Group registered a profit before tax of RM178.295 million, an improvement of RM27.409 million of 18.17% compared to the previous year corresponding quarter. The improved profit before tax was mainly due to higher operating profit and lower allowances for impairment losses on loans, advances and financing. Net profit attributable to ordinary equity holders grew by RM78.341 million or 171.65% over the same period to RM123.982 million.

The performance of the respective operating business segments for the current quarter under review as compared to the previous year corresponding quarter is analysed as follows:

Personal financing – The gross income from personal financing in the current quarter was lower compared to the previous year corresponding period due to lower disbursements and decreasing portfolio base.

Corporate loans and financing – The gross income from corporate loans and financing in the current quarter was higher compared to the previous year corresponding quarter due to the continued growth of corporate loans and financing assets base.

Property financing and mortgage loans – The gross income from property financing was higher in the current quarter compared to the previous corresponding quarter due to growth in its financing assets base. This was partly set off by lower income from mortgage loans as its assets base decrease due to declining disbursements.

Auto financing – The gross income from auto financing in the current quarter was lower compared to the previous year corresponding quarter due to decreasing portfolio base.

Prospects

Brief Overview and Outlook of the Malaysian Economy

The Malaysian economy recorded a stronger growth of 6.2% in the third quarter of 2017 (2Q 2017: 5.8%). Private sector spending continued to be the main driver of growth. The external sector also contributed positively to growth, as real exports expanded at a faster pace (11.8%; 2Q 2017: 9.6%), supported by stronger demand from major trading partners. On a quarter-on-quarter seasonally-adjusted basis, the economy grew by 1.8% (2Q 2017: 1.3%).

Domestic demand grew by 6.6% in the third quarter of the year (2Q 2017: 5.7%), supported by continued expansion in both private sector expenditure (7.3%; 2Q 2017: 7.2%) and public sector spending (4.1%; 2Q 2017: 0.2%). Private consumption expanded by 7.2% (2Q 2017: 7.1%), underpinned by better labour market conditions. In particular, private sector wages were sustained amid stronger employment growth. Private investment registered a stronger growth of 7.9% (2Q 2017: 7.4%), mainly in the services and manufacturing sectors. Within the manufacturing sector, both export- and domestic-oriented subsectors undertook higher capital spending during the quarter. Business sentiments also remained above the optimism threshold, in line with favourable external and domestic demand conditions.

Public consumption expanded by 4.2% (2Q 2017: 3.3%) following faster growth in emoluments amid continued prudence in spending on supplies and services. Public investment turned around to register positive growth of 4.1% during the quarter (2Q 2017: -5.0%). This was due to higher fixed assets spending by both the Federal Government and public corporations.

(Source: Extracted from the latest BNM Quarterly Bulletin - Developments in the Malaysian Economy, Third Quarter 2017)

Banking system resilient

The banking sector remained resilient and well-capitalised during the third quarter of 2017. The common equity tier 1 (CET1) capital ratio; tier 1 capital ratio; and total capital ratio remained steady at 13.2%, 14.1% and 17.1%, respectively (end-September 2016: 13.3%; 14.2%; 16.7%). The pre-tax profit of the banking system eased to RM9 billion (Q3 2016: RM8.1 billion) mainly due to lower dividend contributions from subsidiaries. Meanwhile, loan quality of the banking system was stable with the net impaired loans ratio remaining at 1.2% of total net loans.

(Source: Extracted from the latest Quarterly Update on the Malaysian Economy – Third Quarter 2017, Ministry of Finance)

Overall liquidity conditions remained sufficient for financial intermediation

In the banking system, liquidity conditions remained sufficient at both the institutional and system-wide levels. The level of surplus liquidity placed with BNM increased during the quarter due to higher net inflows, which also led to the reduction in liquidity injection operations. At the institutional level, most banks continued to maintain surplus liquidity positions.

The growth of net financing moderated to 6.4% during the quarter (2Q 2017: 7.0%) due to lower growth for both outstanding loans (3Q 2017: 5.0%; 2Q 2017: 5.6%) and corporate bonds (3Q 2017: 10.9%; 2Q 2017: 11.8%). The lower loan growth was due mainly to the slower growth in outstanding loans of businesses other than SMEs (3Q 2017: 4.0%; 2Q 2017: 6.3%), which partly reflected the higher repayment by a few large firms (3Q 2017: RM115.3 billion; 2Q 2017: RM112.9 billion). Loan growth to SMEs, however, was stable at 7.0% (2Q 2017: 7.0%), with higher loans disbursed during the quarter (3Q 2017: RM76.8 billion; 2Q 2017: RM69.3 billion). Household loans grew at a slightly slower pace of 4.9% during the period (2Q 2017: 5.1%), mainly reflecting the moderation in loans for passenger cars; personal financing; and purchase of non-residential property.

(Source: Extracted from the latest BNM, Quarterly Bulletin - Monetary and Financial Developments in the Malaysian Economy, Third Quarter 2017)

Development of the Islamic finance industry

Over the next two years, the development of the Islamic finance industry will focus on enabling greater business diversification, driven by technology, to sustain its growth trajectory and deliver better value to customers. Towards this end, BNM will intensify industry engagements to encourage more innovative applications of Shariah contracts in funding, financing and investment instruments.

In meeting the demand for Shariah-compliant financial products and services, Islamic financial institutions are expected to assume a larger role in value-based intermediation, beyond existing credit intermediation roles, to contribute more effectively towards the broader economic and social development. This vision for the Islamic financial sector is also supported by the transformation of the Islamic finance education landscape to address the talent needs of the industry.

By 2020, Shariah-compliant financing is expected to account for 40% of total financing in Malaysia. Investment accounts (“IA”) expanded further during the year as a new source of funding for Islamic banks. The risk sharing features of IA are expected to support entrepreneurship, facilitated by more efficient arrangements for the intermediation of investments by the Islamic banking industry.

(Source: Chapter 4: Islamic Finance Development, Financial Stability and Payment Systems Report 2016, BNM)

Group Prospect

With the acquisition of Asian Finance Bank Berhad ("AFB") and subsequent transfer of the Company's Shariah-compliant assets and liabilities to AFB approved by the Company's shareholders on 23 January 2018, the Group will transform itself into a licenced Islamic bank. Pre-integration activities have been smooth for operation integration pursuant to the completion of the proposed acquisition in 1st quarter of 2018.

Following the completion, the Group will offer Islamic banking services to both retail and wholesale banking customers such as amongst others, deposit taking, wealth management, foreign exchange, investment banking, debt capital management and trade finance. The transformation is an opportunity for the Group to participate in the growing Islamic banking segment.

The acquisition of AFB will contribute positively to the Group. Barring any unforeseen circumstances, the Group expects its performance for 2018 to be satisfactory.