The Three Numbers That Drive Hong Leong Financial Group Berhad

It began life as a trading company. But the buyer and seller of construction material has grown into one of Malaysia’s venerable financial conglomerates.

Today Hong Leong Financial Group (KLSE: 1082.KL; KLSE: HLFG.KL) operates banks and insurance companies in Singapore, China, Vietnam and Cambodia, in addition to its home base in Malaysia.

Last year, Hong Leong Financial Group (HLFG) reported a Return on Equity of 8.1%. That is slightly lower than some of Malaysia’s other banks such as Public Bank (KLSE: 1295.KL; KLSE: PBBANK). But HLFG is more than just a straightforward bank.

HLFG makes a good Net Income Margin (NIM). It made MYR35.6 on every MYR100 of revenue. Its NIM of 35.6% is higher than the market average in Malaysia, which is around 20%.

The financial conglomerate’s Asset Turnover is not especially high. At 0.022 it is significantly lower that than the 30 companies that make up the Kuala Lumpur Composite Index (KLSE: ^KLCI). It is not unusual for a financial institution to have a low Asset Turnover. Most of the assets are made up of loans.

HLFG also makes use of leverage – a lot of leverage. That is not surprising because every dollar that is deposited at the bank is treated as a liability.

Its Leverage Ratio of 10.4 is on par with Malayan Banking Berhad (KLSE: 1155.KL; KLSE: MAYBANK) and CIMB Group Holdings Berhad (KLSE: 1023.KL; KLSE: CIMB) that have Leverage Ratios of 11.1 and 10.9, respectively.

By deconstructing Hong Leong Financial Group’s Return on Equity, it is easy to see how it is driven. Its RoE of 8.1 is the product of a high Net Income Margin of 35.6%; a low Asset Turnover of 0.22 and a hefty Leverage Ratio of 10.4

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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.