Why Hong Leong Bank Berhad Is On Song

With roots stretching back to 1905, Hong Leong Bank Berhad (KLSE: 5819.KL; KLSE: HLNABK) is a financial institution with a long history. It was founded originally as Kwong Lee Mortgage & Remittance Company in Kuching. But today, it is a MYR27 billion lender with operations in Malaysia, Singapore, Vietnam and Cambodia.

Hong Leong Bank boasts a Return on Equity (RoE) of 13.1%. It means that the bank makes MYR13.10 on every MYR100 of shareholder equity invested. By comparison, the RoE of Malayan Banking (KLSE: 1155.KL; KLSE: MAYBANK) is 10.8%, whilst Singapore’s largest bank, DBS Group (SGX: D05) generated a RoE of 10.4% last year.

The high Return on Equity can be traced to an equally lofty Net Income Margin (NIM) of 54.2%. Hong Leong made MYR54.20 profit on every MYR100 of revenue that it generated last year. Revenue in this case comprises the interest it charges on loans less the interest it pays on deposits, plus the gains it makes on trading activities. Malayan Banking reported a Net Income Margin of 35.5%, while Singapore’s Oversea-Chinese Banking Corporation (SGX: O39) margin was 47.4%.

By banking standards, Hong Leong Bank’s Asset Turnover of 0.022 is quite respectable – the banks has a lot of assets on its balance sheet. In the case of Hong Leong Bank, it had MYR188.5 billion in assets, of which MYR100 billion were loans.

Hong Leong also makes use of leverage, which is not uncommon for a bank. Its Leverage Ratio of 10.90 is comparable to other banks that include Public Bank (KLSE: 1295.KL; KLSE: PBBANK) and CIMB Group Holdings (KLSE: 1023.KL; KLSE: CIMB) with leverage ratios of 11.3 and 10.9 respectively.

By dismantling Hong Leong’s Return on Equity, it is easy to understand why it is on song. Its RoE of 13.1% is the product of a high Net Income Margin of 54.2%; a low Asset Turnover of 0.022 and a Leverage Ratio of 10.96.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.