Managing Director s Operations Review

Transcription

1 Managing Director s Operations Review In the Name of Allah, the Most Gracious, the Most Merciful and Salam Sejahtera Dear Stakeholders, The robust domestic demand and favourable export performance enabled the Malaysian economy to expand by 6.3% in 2007 and 7.1% in the first half of Although high prices of goods and services in particular related to fuel, food and building materials led consumers and businesses to adopt a more cautious stance, growth was broad-based across sectors with the services sector outperforming the overall economy and all other sectors. This economic backdrop characterised the business environment of the financial services sector during our financial year ended 30 June 2008 ( FY2008 ), in particular in the second half of FY2008. Fairly unshaken by the challenging environment and increasingly intensified competition from both conventional and Islamic banking players, Bank Islam and its subsidiaries ( the Group ) stayed focused on strengthening its business fundamentals, acquiring quality assets, diversifying into and increasing non-fund based income, introducing more innovative products and improving on its service delivery. These strategies and the resilience of the Malaysian economy, in particular the services sector during the review period enabled Bank Islam and the Group to achieve another year of record profits. DATO ZUKRI SAMAT 23

2 Financial Performance Review Income and PBZT The Group s income increased by RM million or 15.9% to RM1.18 billion while Profit before Zakat and Tax ( PBZT ) rose by RM million or 49.5% to RM million. The robust growth was driven by significant expansion in quality financing, higher returns from our treasury portfolio, continuous contribution from our recovery efforts as well as growth in non-fund based income. The Bank remained the main earnings contributor, turning in a PBZT of RM million (RM million in FY2007) while BIMB Foreign Currency Clearing Agency Sdn Bhd ( BIFCA ) reported a PBZT of RM20.35 million (RM0.61 million in FY2007). Assets, Deposits and Ratios The Bank s total assets stood at RM23.56 billion as at 30 June 2008, an increase of RM4.47 billion from a year ago. This was largely due to the strong growth of our customer deposit balance by RM3.15 billion, leading Treasury placements to increase by RM3.76 billion. Current accounts and savings accounts ( CASA ) combined accounted for 39.9% (RM8.28 billion) of total deposits (RM20.76 billion). Although gross financing grew by RM million, financing-to-deposit ratio declined to 50.4% from 55.9% due to a faster deposit growth. Total gross non-performing financing ( NPF ) dropped to RM1.95 billion from RM2.19 billion thus improving gross NPF ratio to 18.6% from 22.2% whilst the net NPF ratio fell to 7.8% from 11.4%. Based on the FY2008 results, the Bank s Return on Equity ( ROE ) rose to 26.5%, which is above the industry average, compared to 23.3% in FY2007. The Return on Assets ( ROA ) was 1.5% for both the Bank and the Group. With the strong performance, the Bank s Risk-Weighted Capital Ratio ( RWCR ) improved further to 12.9% from 12.0% in FY2007. The Bank s Net Tangible Assets ( NTA ) per share improved to RM0.76 from RM0.59. Business Operations Review Overall, Bank Islam s business divisions exceeded the performance targets set, contributing to the record earnings. Our strategy remains focused on revenue growth in preference of assets growth via non-fund based income in particular, leveraging on investment banking and treasury activities as well as cash management solutions and wealth management services. To enable Bank Islam to respond even faster to the needs of our corporate customers, the Business Banking division was reorganised into two divisions - Corporate and Commercial. Moving forward, Bank Islam will continue to introduce new launches or enhance existing products to increase the breadth and depth of Bank Islam s product base while meeting the financial needs of corporations, small-and-medium-sized enterprises ( SMEs ) and other business entities. 24

3 1.Consumer Banking Customers Come First Consumer Banking s operations continued to be the key earnings contributor to the Bank. The division adopted a balanced strategy, striving for a commendable asset growth by expanding the financing portfolio. At the same time, it galvanised the collection of low-cost customer deposits, in particular CASA for net yield enhancement. In addition, Consumer Banking also pursued a revenue growth strategy without locking in capital through non-fund based income drive. Innovative products launched Combining expertise with innovation and technology, Bank Islam recently launched new products with unique features: Payment Holiday Scheme. Customers are entitled to skip instalments for the months of November and December every year until the maturity of the financing tenure i.e. 10 instalments in a year instead of 12. This would help ease the financial burden of customers towards year-end when they are traditionally faced with higher-than-usual cash requirements for back-to-school spending, Zakat payment, annual holiday or any other festive seasonrelated expenses. No Payment During Construction. Under this scheme, the repayment of the financing will commence only upon completion of the construction and after delivery of vacant possession by the developer. This would ease the financial burden of house-buyers who are likely to be servicing monthly rental while the purchased house is under construction. Capital Protected Structured Investment Product An Najah NID-i. This structured investment product enables high net worth customers to enjoy relatively higher returns compared to a traditional deposit product while having their capital protected. Although this structured product under the healthcare theme, the first of its kind in Malaysia, was officially launched in August 2008, its planning and development commenced in the third quarter of FY2008. New Schemes and Strategic Partnerships Housing Credit Guarantee Scheme or more popularly known as Skim Jaminan Kredit Perumahan ( SJKP ): This is a joint community project with the Ministry of Finance ( MOF ) to assist creditworthy individuals who have difficulties to provide evidence to substantiate their income in home financing applications. The response to this scheme has been overwhelming so far with applications coming mainly from farmers, fishermen and sole proprietors of provision shops. Strategic partnership with Lembaga Tabung Haji ( TH ): This collaboration between Bank Islam and TH to enhance automated teller machine ( ATM ) services offered to their respective customers provides an additional platform for TH contributors to deposit and withdraw cash at Bank Islam s electronic banking sites nationwide. The collaboration, launched in the third quarter of FY2008 also contributed to the increase in Bank Islam s non-fund based income

4 Caring for Customers During the year under review, Consumer Banking also took proactive measures to help ease the burden on customers due to cost-of-living pressures resulting from retail fuel price hikes, electricity tariff increases and higher food prices. Customers with financing commitments with Bank Islam are given two options: Utilisation of Employees Provident Funds ( EPF ): Assistance to customers in withdrawing funds from their EPF Account II to help reduce either their monthly instalments or their outstanding financing amount. Restructure or Reschedule financing accounts: Customers have the option to reduce the amount of monthly instalments, giving them a breathing space to bridge their income to expenses. IFSB Compliance Shariah product structures currently in application by Bank Islam are under review to ensure compliance with the Islamic Financial Services Board ( IFSB ) requirements. Below are several new product structures that we intend to adopt: Products based on the Shariah contracts such as Bai Inah and a combination of Qardh and Bai Al-Sarf will be replaced with Tawarruq, a concept that can be applied for both financing and deposit products. Tawarruq is a Shariah contract that makes use of non-ribawi item (metal) as the trading commodity. For example, under the Bai Inah contract, previously applied for Bank Islam Card (credit card) facility, a customer is required to visit a Bank Islam branch for the Aqad solemnisation, card collection and activation in order to comply with the Shariah requirements associated with the Bai Inah contract. Under the Tawarruq contract, the new card can be sent directly to customers while the Aqad solemnisation and activation of the facility can be made via telephone thus improving the Bank s service delivery. We are in the midst of developing new home and fixed asset financing products based on the tripartite Bai Murabahah (cost plus margin), Bai Istisna (sale by order) convertible to Ijarah Muntahiah Bit Tamlik (leasing ending with transfer of ownership), Istisna with Parallel Istisna and Musharakah Mutanaqisah (diminishing Musharakah) contracts as alternatives to the Bai Bithaman Ajil ( BBA ) contract. 2.Commercial Banking More Innovative Financing Solutions In view of the current economic and financial uncertainties, global and local financial institutions have embarked on a de-leveraging drive as demand for credit and financing facilities begins to slow. Despite the challenging business conditions, the Commercial Banking division has maintained a sustainable level of new financing with the support from Bank Islam s business partners and investors seeking opportunities in Malaysia, particularly in the five growth corridors, launched successively since

5 During the year under review, the division focused on providing integrated financing solutions to both major corporations and SMEs involved in core economic sectors such as infrastructure, construction, oil and gas, properties and telecommunications. The division s financing portfolio grew by 7.5% during the year. About 60% of the total new financings disbursed in FY2008 went to corporate customers including the Government-linked companies ( GLCs ) while SMEs booked the remaining 40%. Financing Programmes Bank Islam s comprehensive portfolio of Shariah-based products and services were specifically designed to meet the fast evolving demand of the modern-day small businesses especially in terms of transparency and prudent approach to managing risks. Taking cognisance of entrepreneurs constant search for more competitively priced products, Bank Islam s Micro Financing-i was designed to assist small businesses gain easy access to fast and hassle-free financing facilities with minimum documentation. Commercial Banking s existing financing programme namely the Procurement Contract Financing-i ( PCF-i ) was also a roaring success in FY2008 as reflected in a 116% jump in its financing approvals. PCF-i is a comprehensive programme of solutions for commercial customers by which Bank Islam finances the project awarded by a reputable principal in particular the Government and its agencies. Going forward, the Bank intends to incorporate most recent Shariah-based products to enhance the competitiveness of the programme. Financing Strategies Specific Programme Financing entails targeting specific groups of customers to enable the division to achieve revenue and asset growth without compromising on the risks. Customer-Centric Model is an exercise to keep Bank Islam focused on customer satisfaction with the objective of maintaining rapport and exploring potential new businesses with existing customers. Product, Pricing and Distribution Strategy involves a re-organisation of the division in managing the needs of different customer groups more efficiently. Micro financing is a fast-tracked financing programme which caters to the needs of vendors for selected multinational and public listed companies of specifically identified sectors. Micro financing is in support of the Government s efforts to improve small and micro businesses access to financing. 3. Corporate Banking Value-adding Services During the year under review, all transaction-related services for corporate customers have been regrouped and put under the purview of this division. The internal re-organisation exercise is part of Bank Islam s on-going transformation efforts to deliver superior banking services to its corporate customers especially in assisting them to manage their receivables, payables and liquidity requirements. The division s core activities involve various centralised processes, automation and straight through processing. Several innovative products and process enhancements were introduced, which 27

6 translated into better cash flow management and efficiency gains for Bank Islam s corporate customers. Notwithstanding the cautious business sentiment, the Corporate Banking division s performance was driven by strong growth in two key services, namely cash management and trade services. Cash Management Among the new services introduced were: Bulk cheque issuing service whereby businesses outsource the issuing of cheques to Bank Islam. It eliminates the inconvenience of manual cheque issuing and signing at customers end. Our customers now enjoy a more efficient and secure way of managing their payables and reconciliation. Online payment portal whereby Bank Islam takes on the role of the acquiring bank for the Government s online revenue collection through various gateways such as the Financial Process Exchange ( FPX ) and MasterCard Internet. Customers can now pay their bills online by debiting their current or savings account with any FPX participating banks or by charging it to their credit cards. Online sweeping and pooling arrangements facilitate effective liquidity management for businesses. It enables businesses with multiple accounts to have a more systematic and controlled account management in maximising liquidity and profitability. Bank Islam will continue to provide value added cash management services, placing its focus on customised solutions to meet customers needs and requirements. Trade Services The utilisation of Bank Islam s trade line facilities expanded strongly, reflecting the success of the enhancement of Shariah-based trade facilities and the vigorous promotional campaign of these services among corporate customers. Bank Islam will continue to emphasise on the development of new, and enhancement of existing products as well as regular reviews of manuals and process flows to further improve delivery and efficiency. All these initiatives will be carried out in accordance with Shariah requirements as well as statutory rules and regulations including IFSB standards. 4. Treasury Helping Customers Manage Forex Needs The Treasury division s revenue for FY2008 increased by 34% from a year ago. Revenue from the sale and distribution of foreign exchange ( forex ) related products was also significantly higher in FY2008, driven by an expansion in customer base and increases in both the number and volume of transactions. The higher corporate forex sales volume helped push profit up by 22%. Several new Shariah-based products and derivatives such as Shariah-based swaps, options and structured investment products were introduced to assist customers in managing their foreign currency exposures. At the same time, Treasury s traditional products such as deposits, 28

7 investment securities, fixed income and money market instruments remained highly in demand. Money market sales also registered strong growth both in terms of volume and total number of transactions in FY2008. Volume surged by 74% in the previous financial year while total number of transactions more than doubled to 35,373 from 15,993 a year ago. In FY2008, the Treasury division also adopted a deliberate strategy to enhance Bank Islam s market presence by aggressively promoting its capabilities and competitive strengths. 5.Corporate Investment Banking Making History The division staged a commendable performance during its first full year of operations in an environment characterised by challenging economic and political landscapes, intense competition and weak market sentiment. The division exceeded its target for new mandates and made a significant contribution to Bank Islam s non-fund based income in FY2008. To capitalise on the opportunities created with the introduction of the Capital Market & Services Act ( CMSA 2007 ) in 2007, a Corporate Finance ( CF ) department was established in FY2008 to undertake equity-linked fundraising exercises and advisory services. Apart from complementing the division s core debt advisory activities, the CF department also enables the division to offer existing and potential clients a wider spectrum of services covering both debt and equity related corporate exercises. Eventually, the newly established department will become another important revenue generator for the division. Although only operational for just over six months and minimally staffed, the CF department surpassed expectations by securing a number of mandates, including an offshore merger and acquisition ( M&A ) exercise. The department achieved a significant milestone when it acted as advisor for a mandatory general offer, making history for Bank Islam as the first commercial bank, be it Islamic or conventional to advise on such a transaction, leveraging on the wholesale licence given to Islamic banks. The Debt Capital ( DC ) department performed equally well, securing several notable mandates, including Joint Lead Arranger, Guarantor and Primary Subscriber for AirAsia Berhad s RM million Bank Guaranteed Sukuk Ijarah programme, the low-cost carrier s maiden foray into the sukuk and/or bond market. Other noteworthy mandates completed during the year include Sistem Lingkaran Lebuhraya Kajang Sdn Bhd s ( SILK ) RM million Sukuk Mudharabah issue as Shariah Advisor and Subscriber and PLUS Expressways Berhad s RM4.00 billion Sukuk Musharakah programme as Joint Bookrunner. These projects and mandates have contributed significantly towards increasing Bank Islam s visibility and presence in the investment banking industry as well as helped enhance the division s credentials while providing a sound platform from which Bank Islam should emerge competitive in the battle for deals in the future. The division will continue to leverage on both its debt and equity advisory services and the ability to offer clients wholesome financial solutions to secure mandates. 29

8 Marketing initiatives will continue to capitalise on Bank Islam s strong branding and well-recognised Shariah-based structuring capabilities. In addition, Bank Islam can also count on its international and domestic shareholders as well as extensive network of regional offices and branches. Collaboration with other financial institutions on joint deals will also be stepped up to bolster the balance sheet capacity and to ride on strategic partners competitive edges or strengths. 6.Recovery Division Pre-empting Delinquent Financing This division was set up in FY2007 as Special Asset Management Division to remove the distraction of managing distressed assets from business units so as to allow Bank Islam to concentrate on its core business. Subsequently, to implement a Bad Bank strategy, recovery efforts of consumer and corporate bad financing have been consolidated under one roof in FY2008. Adopting a dynamic and intensive recovery programme, the division has contributed significantly to Bank Islam s bottom line. As a result of this recovery programme, Bank Islam s net NPF declined substantially to 7.8% in FY2008 from 11.4% a year ago. Employing a combination of strategies, the recovery team is always open to negotiations with customers in order to arrive at win-win solutions, which may include proposals for financing restructuring, rescheduling of instalments and settlement of financing. Only when all these efforts fail will Bank Islam take the hard approach of foreclosure of collateral, legal action and other necessary measures. With the expected slowdown in economic activities and continued inflationary pressures, the incidence of companies and consumers facing cash flow difficulties is likely to rise. The division is fully aware of the rising likelihood of financing turning delinquent and has taken preventive measures to contain NPFs such as the restructuring and rescheduling programme in order to match customers payment capacity. The division will continue to pursue an intensive recovery programme in FY2009. Human Capital Development Investing in Our People Since Bank Islam considers its employees as one of its main assets, the Bank s fundamental human resource strategy is therefore to develop and nurture this asset. To enhance the capabilities of the Bank s human capital, the Human Resources Division ( HRD ) launched several staff development initiatives which should consequently transform Bank Islam into a knowledge-workers organisation with achievement -oriented mindset. We view these initiatives as a form of investment, necessary to support the business and catalyse successes. In FY2008, over RM6.5 million was spent on training as part of our commitment towards human resource optimisation. 30

9 One of our main priorities is to implement initiatives that will help inculcate a high performance culture. In this regard, numerous internal and external training programmes were conducted to equip Bank Islam s staff in the area of functional skills, with emphasis given to enhance our work culture, in line with the Bank s corporate re-branding exercise. Focus was also given to nurturing future leaders through Leadership and Human Capital Development Programmes organised by well-recognised institutional bodies in Malaysia and abroad. In addition, Bank Islam s staff also underwent a series of structured training programmes, which include, among others, INSEAD Leadership and Management Developmental Programme, 7 Habits of Highly Effective People, Strategic Thinking, Strategic Leadership, Sales and Marketing Programmes and Excellent Customer Service. Employee Engagement Score On a Par with Global High Performance Recognising that talented and motivated employees play a significant part in Bank Islam s continued success, a range of processes and benchmarks have been established to measure and enhance the contribution of our people. Bank Islam is strong in aligning its strategies to corporate Key Performance Indicators ( KPIs ) and in conducting regular reviews of corporate performance. In an assessment review carried out by Putrajaya Committee on GLC High Performance, Bank Islam was ranked in the Top Half of the GLCs in terms of Intensifying Performance Management via the Blue Book Implementation. Most impressively, Bank Islam s Employee Engagement Score of 79% is higher than the Malaysian Benchmark Norm of 74%. In fact, Bank Islam s score is closer to the Global High Performance Norm of 83%*. Bank Islam Engagement Score 79% Global High Performance Norm 83% Malaysian National Norm 74% *Source: Catalysing GLC Transformation, Intensifying Performance Management, Blue Book Implementation Assessment for Bank Islam Malaysia Berhad: Final Results, 1 July 2008 Rewards and Benefits Philosophy The strategy under this policy seeks to align pay with performance in order to attract and retain top talents, transforming the Bank into an Employer of Choice. Accordingly, Bank Islam has initiated a Total Compensation Review that would address both internal concerns as well as the Bank s need to benchmark its total remuneration package against that of the banking industry. The Next Challenge HRD envisions itself to be a Value Adding Partner within Bank Islam. Its next challenge is to assist the Bank in achieving organisational greatness by 31

10 producing and retaining great leaders as well as focussed and effective individuals. Moving Forward In the current financial year, the unprecedented global financial crisis with its impact on the real economy worldwide may exert greater pressures on our day-to-day operations. Further intensification in competition and the subdued domestic economic outlook as a result of the US-led global slowdown will certainly stretch our financial and innovative capabilities. However, we are happy to note that Malaysia s robust and resilient Islamic financial system, in which Bank Islam has played a pioneering and leading role, has been a stability anchor in preventing the global sub-prime crisis from affecting our system in any significant way. In the face of these challenges, our strategies are to stay steadfastly focused on our competitive strengths and continue to introduce more innovative consumer and wealth management products. Offering viable Shariah-based products that will help our customers, both individuals and businesses, to protect and grow their investments will be of utmost importance in such volatile times. Given the challenging economic environment, it is imperative for Bank Islam to improve its cost structure and implement effective cost rationalisation measures in particular related to operational and funding costs to ensure budget efficiencies and ultimately, guard its profitability within acceptable margins. The Bank s plan to add 25 new branches over the next three years remains on track. Three of these new branches, to be located in Ampang, Selangor; Kelana Jaya, Selangor and Sandakan, Sabah will be operational by December These branches will enhance the Bank s presence in thriving commercial centres and help extend our reach to both Muslim and non-muslim customers. To reinforce our brand name and establish our presence or strengthen our existing leadership position in certain segments, we will continue to capitalise on the privileged relationship that we have built over the years with Government-linked investment companies, in particular TH, which is also one of our major shareholders as well as other GLCs in general. Indeed, collaboration with these strategic corporate partners will be a key feature of our business endeavours going forward. Last but not least, while we will carry on with our strategy of growing organically, we will certainly explore merger and acquisition possibilities should the opportunity arise. DATO ZUKRI SAMAT Managing Director 32