What Investors Should Know About This Leading Malaysian Financial Institution: Hong Leong Financial Group Berhad

The Malaysia-listed Hong Leong Financial Group Berhad (KLSE: 1082.KL) may share a very similar name to the Singapore-listed financial institution Hong Leong Finance Ltd (SGX: S41). But, the two companies are actually different entities.

Hong Leong Financial Group, or HLFG, for short, is one of the leading financial institutions in Malaysia. Its business activities range from the provision of personal finance services to business banking services and from insurance to investment banking services.

Currently, HLFG has total assets of RM210 billion (around S$69 billion). For perspective, Malaysia’s largest bank is Malayan Banking Berhad (KLSE: 1155.KL), with total assets of RM715 billion (around S$236 billion). In Singapore’s case, the biggest bank would be DBS Group Holdings Ltd (SGX: D05); it has total assets of S$465 billion.

What I want to do here is to provide a quick but useful overview of HLFG using two simple metrics, the cost to income ratio and the return on assets.

The cost to income ratio

The cost to income ratio measures the percentage of a financial institution’s income (income here is analogous to revenue) that is expensed by the company to run its business.

What we need to understand is relatively straight forward: The lower the expenses, the higher a financial institution’s profitability. In other words, the lower the cost to income ratio is, the better it could be.

In HLFG’s case, its cost to income ratio in its fiscal year ended 30 June 2016 (FY2016) is 46.5% (excluding non-recurring costs). Meanwhile, DBS Group’s cost to income ratio in 2015 is 45.4%.

In other words, despite being much smaller in size, HLFG is almost as efficient as Singapore’s largest bank.

The return on assets

The return on assets metric measures the ability of a financial institution to utilise its assets to generate a profit. The more profit generated per dollar of assets held by a financial institution, the higher its return on assets is.

HLFG has a return on assets of 0.7% in FY2016. DBS on the other hand, clocked a return on assets of 0.96% in 2015.

Though there could be many reasons why HLFG has a lower return on assets as compared to DBS Group, one of the main culprits would be its smaller size. Thing is, size matters in the operations of a lender, since it allows fixed costs to be efficiently spread out over a larger base.

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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 contributor Lawrence Nga doesn’t own shares in any companies mentioned.