HSBC AMANAH MALAYSIA BERHAD (Company No. ) (Incorporated in Malaysia) UNAUDITED CONDENSED INTERIM FINANCIAL STATEMENTS 30 SEPTEMBER 2010 Domiciled in Malaysia. Registered Office : 2, Leboh Ampang, 50100 Kuala Lumpur
HSBC AMANAH MALAYSIA BERHAD (Company No. ) (Incorporated in Malaysia) UNAUDITED CONDENSED STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 2010 Note Assets Cash and short-term funds 10 1,252,566 687,308 Financial Assets Held-for-Trading 11 428,131 127,386 Financial Investments Available-for-Sale 12 326,159 384,220 Financing and advances 13 4,111,759 3,164,973 Other assets 15 26,076 376,653 Statutory deposits with Bank Negara Malaysia 31,029 28,529 Equipment 12,574 7,500 Intangible assets 1,679 2,223 Deferred tax assets 18,767 13,884 Total Assets 6,208,740 4,792,676 Liabilities Deposits from customers 16 3,100,291 2,472,411 Deposits and placements of banks and other financial institutions 17 1,942,838 1,510,907 Bills and acceptances payable 3,451 3,298 Other liabilities 18 398,884 61,629 Provision for taxation and zakat 3,919 3,787 Total Liabilities 5,449,383 4,052,032 Shareholders' Equity Share capital 50,000 50,000 Reserves 709,357 690,644 Total Shareholders' Equity 759,357 740,644 Total Liabilities and Shareholders' Equity 6,208,740 4,792,676 Commitments and Contingencies 26 1,801,354 1,680,000 The unaudited condensed interim financial statements should be read in conjunction with the audited financial statements of the Bank for the financial year ended 31 December 2009 and the accompanying explanatory notes on pages 5 to 26 attached to the unaudited condensed interim financial statements. The financial statements were approved by the Board of Directors on 27 October 2010. 1
HSBC AMANAH MALAYSIA BERHAD (Company No. ) (Incorporated in Malaysia) UNAUDITED CONDENSED STATEMENT OF COMPREHENSIVE INCOME FOR THE THIRD QUARTER AND NINE MONTHS ENDED 30 SEPTEMBER 2010 Third Quarter Ended Year-To-Date Ended 30 Sep 2010 30 Sep 2009 30 Sep 2010 30 Sep 2009 Note Income derived from investment of depositors' funds and others 19 78,953 56,980 212,384 187,310 Income derived from investment of shareholders' funds 20 23,956 19,537 65,871 53,713 Impairment losses on financing 21 (23,342) (11,261) (58,750) (37,796) Total distributable income 79,567 65,256 219,505 203,227 Income attributable to depositors 22 (29,054) (17,184) (67,330) (58,919) Total net income 50,513 48,072 152,175 144,308 Personnel expenses 23 (5,495) (5,531) (18,174) (16,170) Other overheads and expenditures 24 (34,973) (24,641) (103,301) (77,823) Profit before taxation and zakat 10,045 17,900 30,700 50,315 Taxation and zakat (5,403) (4,926) (11,175) (13,697) Net Profit for the financial period 4,642 12,974 19,525 36,618 Other comprehensive income Net gain/ (loss) on revaluation of financial investments available-for-sale 3 (364) (830) 57 Income tax relating to components of other comprehensive income 134 90 (15) - Other comprehensive income for the period, net of tax 137 (274) (845) 57 Total comprehensive income for the period 4,779 12,700 18,680 36,675 Earnings per RM0.50 ordinary share - basic 4.6 sen 13.0 sen 19.5 sen 36.6 sen The unaudited condensed interim financial statements should be read in conjunction with the audited financial statements of the Bank for the financial year ended 31 December 2009 and the accompanying explanatory notes on pages 5 to 26 attached to the unaudited condensed interim financial statements. The financial statements were approved by the Board of Directors on 27 October 2010. 2
HSBC AMANAH MALAYSIA BERHAD (Company No. ) (Incorporated in Malaysia) UNAUDITED CONDENSED STATEMENT OF CHANGES IN EQUITY FOR THE NINE MONTHS ENDED 30 SEPTEMBER 2010 Non-distributable Distributable Available- Share Share Statutory for-sale Retained Total capital premium reserve reserve profits Note 2009 Balance as at 1 January 2009 50,000 610,000 11,361 1,091 11,360 683,812 Total comprehensive income for the period Profit for the period - - - - 36,618 36,618 Other comprehensive income, net of income tax Net unrealised losses on revaluation of securities available for sale, net of tax - - - 57-57 Total other comprehensive income - - - 57-57 Total comprehensive income for the period - - - 57 36,618 36,675 Balance as at 30 September 2009 50,000 610,000 11,361 1,148 47,978 720,487 2010 Balance as at 1 January 2010, as previously stated 50,000 610,000 40,104 437 40,103 740,644 - effect of adopting FRS 139 28 - - - - 33 33 Balance as at 1 January 2010, restated 50,000 610,000 40,104 437 40,136 740,677 Total comprehensive income for the period Profit for the period - - - - 19,525 19,525 Other comprehensive income, net of income tax Net unrealised losses on revaluation of securities available for sale, net of tax - - - (845) - (845) Total other comprehensive income - - - (845) - (845) Total comprehensive income for the period - - - (845) 19,525 18,680 Balance as at 30 September 2010 50,000 610,000 40,104 (408) 59,661 759,357 The unaudited condensed interim financial statements should be read in conjunction with the audited financial statements of the Bank for the financial year ended 31 December 2009 and the accompanying explanatory notes on pages 5 to 26 attached to the unaudited condensed interim financial statements. The financial statements were approved by the Board of Directors on 27 October 2010 3
HSBC AMANAH MALAYSIA BERHAD (Company No. ) (Incorporated in Malaysia) UNAUDITED CONDENSED CASH FLOW STATEMENT FOR THE NINE MONTHS ENDED 30 SEPTEMBER 2010 30 Sep 2010 30 Sep 2009 Profit before taxation and zakat 30,700 50,315 Adjustments for non-operating and non-cash items 3,087 1,476 Operating profit before working capital changes 33,787 51,791 Changes in working capital: Net changes in operating assets (897,266) 388,914 Net changes in operating liabilities 1,397,230 (316,798) Taxation and Zakat paid (18,141) (11,667) Net cash generated from operating activities 515,610 112,240 Net cash used in investing activities 49,648 192,267 Net cash generated from financing activities - - 49,648 192,267 Net changes in cash and cash equivalents 565,258 304,507 Cash and cash equivalents at beginning of the period 687,308 1,009,083 Cash and cash equivalents at end of the period 1,252,566 1,313,590 Analysis of cash and cash equivalents Cash and short-term funds 1,252,566 1,313,590 The unaudited condensed interim financial statements should be read in conjunction with the audited financial statements of the Bank for the financial year ended 31 December 2009 and the accompanying explanatory notes on pages 5 to 26 attached to the unaudited condensed interim financial statements. The financial statements were approved by the Board of Directors on 27 October 2010 4
HSBC AMANAH MALAYSIA BERHAD (Company No. ) (Incorporated in Malaysia) EXPLANATORY NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 30 SEPTEMBER 2010 1 General Information HSBC Amanah Malaysia Berhad ( the Bank ) incorporated on 26 February 2008, is a licensed Islamic Bank under the Islamic Banking Act, 1983. The immediate holding company of the Bank is HSBC Bank Malaysia Berhad a licensed bank incorporated in Malaysia and the ultimate holding company of the Bank is HSBC Holdings plc, a company incorporated in England. 2 Basis of Preparation The unaudited condensed interim financial statements for the 3rd quarter and nine months ended 30 September 2010 have been prepared in accordance with the requirements of Financial Reporting Standard ("FRS") 134: Interim Financial Reporting issued by the Malaysian Accounting Standards Board ("MASB") as modified by Bank Negara Malaysia's ("BNM") guidelines. The unaudited interim financial statements do not include all of the information required for the full annual financial statements, and should be read in conjunction with the audited financial statements of the bank as at and for the financial year ended 31 December 2009. The explanatory notes attached in the unaudited condensed interim financial statements provide an explanation of events and transactions that are significant for an understanding of the changes in the financial position and performance of the Bank since the financial year ended 31 December 2009. All other significant accounting policies and methods of computation applied in the unaudited condensed interim financial statements are consistent with those adopted in the most recent audited annual financial statements for the year ended 31 December 2009, except for the adoption of the following FRSs, amendments to FRSs, Issues Committee ("IC") Interpretations and Technical Release ("TR"). FRSs / Interpretations -Amendments to FRS 1, First-time Adoption of Financial Reporting Standards and FRS 127, Consolidated and Separate Financial Statements: Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate -Amendments to FRS 2, Share-based Payment: Vesting Conditions and Cancellations -FRS 7, Financial Instruments: Disclosures -FRS 101, Presentation of Financial Statements -Amendments to FRS 132, Financial Instruments: Presentation and FRS 101, Presentation of Financial Statements Puttable Financial Instruments and Obligations Arising on Liquidation -FRS 139, Financial Instruments: Recognition and Measurement -Amendments to FRS 139, Financial Instruments: Recognition and Measurement, FRS 7, Financial Instruments: Disclosures and IC Interpretation 9, Reassessment of Embedded Derivatives - TR i-3, Presentation of Financial Statements of Islamic Financial Institutions -Improvements to FRSs (2009) -IC Interpretation 9, Reassessment of Embedded Derivatives -IC Interpretation 10, Interim Financial Reporting and Impairment -IC Interpretation 11, FRS 2 - Group and Treasury Share Transactions 5
2 Basis of Preparation (continued) FRS 4 (Insurance Contracts), FRS 8 (Operating Segments) and IC Interpretation 14 (FRS 119 -The Limit on a Defined Benefit Asset, Minimum Funding Requirements and Their Interaction) are not applicable to the Bank. The adoption of FRS 7, FRS 101 and amendments to FRS 132 did not impact the financial results of the Bank, as the changes introduced are presentational in nature. The changes in presentation arising from the adoption of FRS7 and FRS 101 are disclosed in Note 28. The principal effects of the changes in accounting policies arising from the adoption of FRS 139 and its related amendments are disclosed in Note 28. The Amendments to FRS 139 include an additional transitional arrangement for entities in the financial services sector, whereby BNM may prescribe the use of an alternative basis for collective assessment of impairment for banking institutions. BNM's guidelines on Classification and Impairment Provisions for Loans/Financing issued on 8 January 2010 require banking institutions to maintain collective impairment provisions of at least 1.5% of total outstanding loans/financing, net of individual impairment provision. Subject to the prior written approval from BNM, banking institutions are allowed to maintain a collective impairment assessment provision based on the banks respective collective impairment assessment methodology. The adoption of the remaining FRSs, amendments to FRSs, IC Interpretations and TR did not have any material impact on the financial results of the Bank. The Bank has not applied the following accounting standards, amendments and interpretations that have been issued by the MASB as they are either not applicable or not yet effective for the Bank. FRS/ Interpretations Effective Date - FRS 1, First-time Adoption of Financial Reporting Standards 1 July 2010 - FRS 3, Business Combinations 1 July 2010 - FRS 127, Consolidated and Separate Financial Statements 1 July 2010 - IC Interpretation 12, Service Concession Arrangements 1 July 2010 - IC Interpretation 15, Agreements for the Construction of Real Estate 1 Jan 2012 - IC Interpretation 16, Hedges of a Net Investment in a Foreign Operation 1 July 2010 - IC Interpretation 17, Distribution of Non-cash Assets to Owners 1 July 2010 - IC Interpretation 18, Transfer of Assets from Customers 1 Jan 2011 - Amendments to FRS 1,First Time Adoption of Financial Reporting Standards- Limited Exemption from Comparative FRS 7 Disclosures for First-time Adopters and Additional Exemptions for First-time Adopters 1 Jan 2011 - Amendments to FRS 2, Share-based Payment IC 1 July 2010 - Amendments to FRS 2, Group Cash-settled Share-based Payment Transactions 1 Jan 2011 - Amendments to FRS 5, Non-current Assets Held for Sale and Discontinued Operations 1 July 2010 - Amendments to FRS 7, Financial Instruments: Disclosures - Improving Disclosures about Financial Instruments 1 Jan 2011 - Amendments to FRS 138, Intangible Assets 1 July 2010 - Amendments to IC Interpretation 9, Reassessment of Embedded Derivatives 1 July 2010 The new requirements above take effect for the annual periods beginning on or after 1 July 2010, except for IC Interpretation 18 and Amendments to FRS 1 and 2 (Group Cash-settled Share-based Payment Transactions) which apply for annual periods beginning on or after 1 January 2012. IC Interpretations 12, 15,16 and 17 are not expected to have any impact on the financial statements of the Bank as they are not relevant to the operations of the Bank. The adoption of the other revised FRSs, amendments to FRSs and Issues Committee Interpretations is not expected to have a significant financial impact on the Bank. 6
3 Auditors' Report On Preceeding Annual Financial Statements The audit report on the audited annual financial statements for the financial year ended 31 December 2009 was not subject to any qualification. 4 Seasonality or Cyclical Factors The business operations of the Bank are not subject to material seasonal or cyclical fluctuations. 5 Unusual Items Due to Their Nature, Size or Incidence There were no unusual items affecting assets, liabilities, equity, net income or cash flows of the Bank for the 3rd quarter and nine months ended 30 September 2010. 6 Changes in Estimates The preparation of financial information requires the use of estimates. The use of available information and the application of judgement are inherent in the formation of estimates; actual results in the future may differ from those reported. Management believes that critical accounting policies where judgement is necessarily applied are those which relate to impairment of loans, advances and financing, the valuation of financial instruments and the impairment of available-for-sale financial investments. There were no material changes in estimates of amounts reported in prior financial years that have a material effect on the financial results and position of the Bank for the 3rd quarter and nine months ended 30 September 2010. 7 Debt and Equity Securities There were no issuances, cancellations, repurchases, resale or repayment of debt and equity securities during the 3rd quarter and nine months ended 30 September 2010. 8 Dividend No dividend was declared nor paid during the nine months ended 30 September 2010. 9 Significant Events There were no material events subsequent to the balance sheet date that require disclosure or adjustments to the unaudited condensed interim financial statements. 7
10 Cash and Short-Term Funds Cash and balances with banks and other financial institutions 34,685 11,046 Money at call and interbank placements maturing within one month 1,217,881 676,262 1,252,566 687,308 11 Financial Assets Held-for-Trading Money market instruments: Malaysian Government Islamic bonds 130,506 88,074 Malaysian Government treasury bills 297,625 39,312 428,131 127,386 12 Financial Investments Available-for-Sale Money market instruments: Malaysian Government treasury bills - 89,791 Malaysian Government Islamic bonds 296,160 106,341 Khazanah bonds - 47,946 Negotiable instruments of deposit 29,999 70,005 326,159 314,083 Unquoted securities: Private debt securities - 70,137 The maturity structure of money market instruments held as securities available-for-sale is as follows: 326,159 384,220 Maturing within one year 29,999 207,742 More than one year to three years 296,160 106,341 326,159 314,083 8
13 Financing And Advances (i) By type Cash line 11,524 4,937 Term financing House financing 353,495 84,073 Hire purchase receivables 179,370 222,434 Lease receivables 202 276 Other term financing 2,959,422 2,300,535 Trust receipts 909 - Claims on customers under acceptance credits 554,203 559,753 Staff financing 7,864 2,895 Credit/ charge cards 229,340 168,429 4,296,329 3,343,332 Less: Unearned income (71,988) (90,379) 4,224,341 3,252,953 Less: Allowance for impaired financing: - Collective allowances for impairment (62,674) - - Individual allowances for impairment (49,908) - - General - (52,597) - Specific - (35,383) Total net financing and advances 4,111,759 3,164,973 (ii) By contract Bai Bithaman Ajil (deferred payment sale) 740,574 835,091 Ijarah (lease) 185 250 Ijarah Thumma Al-Bai (AITAB) (hire purchase) 163,924 201,537 Murabahah (cost-plus) 1,274,513 840,687 Musharakah (profit and loss sharing) 416,182 46,143 Bai Al-Inah (sell and buy back) 1,193,574 1,048,312 Bai Al-Dayn (sale of debt) 141,323 112,504 Ujrah (fee-based) 294,053 168,041 Qard (benevolent financing ) 13 388 4,224,341 3,252,953 (iii) By type of customer Domestic banking institutions 46,462 51,859 Domestic business enterprises Small medium enterprises 828,253 754,434 Others 1,354,676 1,090,730 Government and statutory bodies 26,090 - Individuals 1,749,825 1,273,215 Other domestic entities 3,763 4,235 Foreign entities 215,272 78,480 4,224,341 3,252,953 9
13 Financing And Advances (continued) (iv) By profit rate sensitivity Fixed rate House financing 23,368 32,282 Hire purchase receivables 163,924 201,537 Other financing 2,440,235 2,407,117 Variable rate House financing 332,452 45,293 Other financing 1,264,362 566,724 4,224,341 3,252,953 (v) By maturity structure Maturing within one year 2,139,717 1,617,013 More than one year to three years 639,426 614,744 More than three years to five years 860,189 838,347 Over five years 585,009 182,849 4,224,341 3,252,953 (vi) By sector Agriculture, hunting, forestry & fishing 93,318 95,757 Mining and quarrying 134,572 15,504 Manufacturing 819,859 788,832 Electricity, gas and water 6,323 7,502 Construction 105,118 54,486 Real estate 304,049 243,192 Wholesale & retail trade, restaurants & hotels 167,823 278,066 Transport, storage and communication 237,037 140,760 Finance, insurance and business services 328,500 237,594 Household - Retail 1,777,972 1,283,077 Others 249,770 108,183 4,224,341 3,252,953 (vii) By purpose Purchase of landed property: Residential 349,216 77,981 Non-residential 8,318 7,337 Purchase of securities 1,162 1,356 Purchase of transport vehicles 1,449 94 Purchase of fixed assets excluding land & building 84,450 235,009 Consumption Credit 1,425,337 1,201,896 Construction 105,118 54,486 Working Capital 2,032,469 1,602,143 Other Purpose 216,822 72,651 4,224,341 3,252,953 10
13 Financing And Advances (continued) (viii) By geographical distribution Northern Region 609,355 321,943 Southern Region 533,933 402,186 Central Region 2,728,159 2,160,691 Eastern Region 352,894 368,133 4,224,341 3,252,953 The Northern region consists of the states of Perlis, Kedah, Penang, Perak, Kelantan and Terengganu. The Southern region consists of the states of Johor, Malacca and Pahang. The Central region consists of the states of Selangor, Negri Sembilan and the Federal Territory of Kuala Lumpur. The Eastern region consists of the states of Sabah, Sarawak and the Federal Territory of Labuan. 14 Impaired Financing (i) Movements in impaired financing and advances At beginning of period/ year 55,453 28,476 Classified as impaired during the period/ year 68,598 79,395 Reclassified as performing (691) (255) Amount recovered (10,764) (10,724) Amount written off (47,816) (49,088) Other movements 3,835 7,649 At end of period/ year 68,615 55,453 Less: Individual allowances for impairment (2009: Specific allowance) (49,908) (35,383) Net impaired financing and advances 18,707 20,070 (ii) Movements in allowance for impaired financing Collective allowance for impairment (2009: General allowance) At beginning of period/ year 52,597 52,597 Made during the period/ year 17,042 - Amount written back (6,965) - At end of period/ year 62,674 52,597 With the adoption of FRS 139's transitional provision, the Bank has reversed the 31 December 2009 general allowance and reinstated it as a collective impairment allowance on 1 January 2010 as both general allowance and collective impairment allowance are based on 1.5% of customer advances net of impairment charge. Prior to 1 January 2010, the Bank's classification of impaired financing was already in line with FRS 139 requirement and its specific allowance was already computed on the net present value of future expected cashflows. 11
14 Impaired Financing (continued) Individual allowance for impairment (2009: Specific allowance) At beginning of period/ year 35,383 21,139 - effect of adopting FRS 139 (43) - At beginning of period/ year, restated 35,340 21,139 Made during the period/ year 63,627 65,498 Amount recovered (7,659) (10,979) Amount written off (44,801) (47,924) Other movement 3,401 7,649 At end of period/ year 49,908 35,383 (iii) (iv) (v) (vi) By contract Bai Bithaman Ajil (deferred payment sale) 687 1,112 Ijarah Thumma Al-Bai (AITAB) (hire purchase) 2,063 544 Murabahah (cost-plus) 8,793 9,049 Musharakah (profit and loss sharing) 1,525 - Bai Al-Inah (sell and buy back) 48,314 40,263 Ujrah (fee-based) 7,233 4,485 68,615 55,453 By sector Manufacturing 6,768 5,598 Real estate - 196 Wholesale & retail trade, restaurants & hotels 3,618 3,856 Finance, insurance and business services 664 56 Household - Individuals 57,554 45,747 Others 11-68,615 55,453 By purpose Purchase of landed property: Residential 2,110 1,168 Non-residential 97 122 Consumption credit 55,444 44,578 Working Capital 10,964 9,585 68,615 55,453 By geographical distribution Northern Region 12,762 10,975 Southern Region 11,520 8,534 Central Region 35,352 27,648 Eastern Region 8,981 8,296 68,615 55,453 12
15 Other Assets Revaluation gain on equity related contracts (Note 26) 9,437 10,237 Income receivable 4,108 2,872 Amount due from holding company - 356,775 Other receivables, deposits and prepayments 12,531 6,769 26,076 376,653 16 Deposits From Customers (i) By type of deposit Non-Mudharabah Fund Demand deposits 224,121 128,276 Savings deposits 606,275 508,146 Fixed return investment deposits 542,627 7,017 1,373,023 643,439 Mudharabah Fund General investment deposits 1,594,801 1,628,130 Others 132,467 200,842 3,100,291 2,472,411 The maturity structure of general investment deposits and fixed return investment deposits is as follows: RM'000 RM'000 Due within six months 1,878,402 1,360,450 More than six months to one year 247,230 273,078 More than one year to three years 6,989 461 More than three years to five years 4,807 1,158 2,137,428 1,635,147 (ii) By type of customer Government and statutory bodies 154,579 75,116 Business enterprises 965,127 739,460 Individuals 1,558,452 1,260,537 Others 422,133 397,298 3,100,291 2,472,411 17 Deposits and Placements of Banks and Other Financial Institutions Mudharabah Fund Licensed banks 1,347,954 1,401,291 Other financial institutions 594,884 109,616 1,942,838 1,510,907 13
18 Other Liabilities Revaluation loss on equity related contracts 9,437 10,237 Profit payable 13,421 8,043 Amounts due to holding company/ related companies 320,014 6,285 Profit equalisation reserve 6,700 6,700 Other creditors and accruals 49,312 30,364 398,884 61,629 19 Income Derived from Investment of Depositors' Funds and Others 3rd Quarter Ended Year-To-Date ended 30 Sep 2010 30 Sep 2009 30 Sep 2010 30 Sep 2009 Income derived from investment of: (i) general investment deposits 50,298 44,571 153,146 142,579 (ii) specific investment deposits 9,323 1,270 15,442 14,424 (iii) other deposits 19,332 11,139 43,796 30,307 78,953 56,980 212,384 187,310 (i) Income derived from investment of general investment deposits Finance income and hibah: Financing and advances - Profit earned other than recoveries from impaired financing 45,316 39,383 138,684 123,986 - Recoveries from impaired financing 1,168 1,070 2,953 2,378 Money at call and deposit with financial institutions 3,814 4,118 11,509 12,625 50,298 44,571 153,146 138,989 Other operating income Net gains from dealing in foreign currency - - - 614 Net gains from sale of financial assets held-for-trading and other financial instruments - - - 416 Net unrealised gains from revaluation of financial assets held-for-trading - - - 868 Net profit earned from financial assets held-for-trading - - - 1,692 - - - 3,590 50,298 44,571 153,146 142,579 14
19 Income Derived from Investment of Depositors' Funds and Others (continued) 3rd Quarter Ended Year-To-Date ended 30 Sep 2010 30 Sep 2009 30 Sep 2010 30 Sep 2009 (ii) Income derived from investment of specific investment deposits Finance income and hibah: Financing and advances - Profit earned other than recoveries from impaired financing 3,901 543 7,652 1,942 Financial investments available-for-sale 2,575 1,702 7,651 8,840 Accretion of discount less amortisation of premium (61) 1,454 203 3,735 6,415 3,699 15,506 14,517 Other operating income Fees and commission 752-2,264 - Net gains from dealing in foreign currency 1,681 721 3,480 1,443 Net loss from sale of financial assets held-for-trading and other financial instruments (1,766) (3,896) (9,342) (2,552) Net unrealised (loss)/gains from revaluation of financial assets held-for-trading (69) 131 108 (1,088) Net profit earned from financial assets held-for-trading 2,310 615 3,426 2,104 2,908 (2,429) (64) (93) (iii) Income derived from investment of other deposits 9,323 1,270 15,442 14,424 3rd Quarter Ended Year-To-Date ended 30 Sep 2010 30 Sep 2009 30 Sep 2010 30 Sep 2009 Finance income and hibah: Financing and advances - Profit earned other than recoveries from impaired financing 17,451 9,863 39,660 26,417 - Recoveries from impaired financing 420 251 845 507 Money at call and deposit with financial institutions 1,461 1,025 3,291 2,690 19,332 11,139 43,796 29,614 Other operating income Net gains from dealing in foreign currency - - - 118 Net gains from sale of financial assets held-for-trading and other financial instruments - - - 80 Net unrealised gains from revaluation of financial assets held-for-trading - - - 168 Net profit earned from financial assets held-for-trading - - - 327 - - - 693 19,332 11,139 43,796 30,307 15
20 Income Derived from Investment of Shareholders' Funds 3rd Quarter Ended Year-To-Date ended 30 Sep 2010 30 Sep 2009 30 Sep 2010 30 Sep 2009 Finance income and hibah: Financing and advances - Profit earned other than recoveries from impaired financing 13,402 11,135 34,371 31,261 - Recoveries from impaired financing 331 289 732 600 Money at call and deposit with financial institutions 1,124 1,159 2,852 3,183 14,857 12,583 37,955 35,044 Other operating income Fees and commission 7,839 6,260 24,782 16,188 Net gains from dealing in foreign currency - - - 143 Net gains from sale of financial assets held-for-trading and other financial instruments - - - 97 Net unrealised gains from revaluation of financial assets held-for-trading - - - 203 Net profit earned from financial assets held-for-trading - - - 395 Shared-service fees from holding company 1,222 662 3,008 1,474 Net gains on disposal of equipment - - - 56 Other income 38 32 126 113 9,099 6,954 27,916 18,669 23,956 19,537 65,871 53,713 The above fees and commissions were derived from the following major contributors: Service charges and fees 2,598 2,881 10,383 8,448 Cards 2,894 2,425 8,904 4,729 Agency fees 1,413 600 3,569 1,841 21 Impairment Loss on Financing 3rd Quarter Ended Year-To-Date ended 30 Sep 2010 30 Sep 2009 30 Sep 2010 30 Sep 2009 Impairment charges on financing: (a) Individual impairment/ (2009: Specific allowance) - Made during the financial period 25,716 19,386 63,627 51,229 - Written back (5,204) (6,353) (7,659) (8,968) (b) Collective impairment/ (2009: General allowance) - Made during the financial period 12,100-17,042 - - Written back (6,965) - (6,965) - Impaired financing - Recovered during the financial period (3,700) (2,418) (10,311) (5,286) - Written off 1,395 646 3,016 821 23,342 11,261 58,750 37,796 16
22 Income Attributable to Depositors 3rd Quarter Ended Year-To-Date ended 30 Sep 2010 30 Sep 2009 30 Sep 2010 30 Sep 2009 Deposits from customers - Mudharabah Fund 13,850 10,398 34,494 37,642 - Non-Mudharabah Fund 5,008 815 7,033 2,957 Deposits and placements of banks and other financial institutions - Mudharabah Fund 9,783 5,907 25,260 18,128 Others 413 64 543 192 29,054 17,184 67,330 58,919 23 Personnel Expenses 3rd Quarter Ended Year-To-Date ended 30 Sep 2010 30 Sep 2009 30 Sep 2010 30 Sep 2009 Salaries, allowances and bonuses 4,281 4,578 14,346 12,808 Employees Provident Fund contributions 775 755 2,433 2,124 Other staff related costs 439 198 1,395 1,238 5,495 5,531 18,174 16,170 24 Other Overheads and Expenditures 3rd Quarter Ended Year-To-Date ended 30 Sep 2010 30 Sep 2009 30 Sep 2010 30 Sep 2009 Promotion and marketing related expenses Advertising and promotion 3,294 2,718 8,816 10,579 Establishment related expenses Depreciation of equipment 997 388 2,497 1,078 Amortisation of intangible assets 179 183 556 454 Information technology costs 94 (63) 268 332 Hire of Equipment 10 92 167 107 Rental of premises 1,418 998 3,416 2,442 Fixed assets written off - - 1 - Others 368 127 1,350 553 3,066 1,725 8,255 4,966 General administrative expenses Shared-service fees to immediate holding company 25,221 19,692 73,074 58,939 Auditors' fees Statutory audit 20 13 60 40 Non-audit services 51-134 - Professional fees 375 196 574 972 Others 2,946 297 12,388 2,327 28,613 20,198 86,230 62,278 17 34,973 24,641 103,301 77,823
25 Capital Adequacy Tier 1 capital Paid-up ordinary share capital 50,000 50,000 Share premium 610,000 610,000 Retained profits 40,103 40,103 Statutory reserve 40,104 40,104 740,207 740,207 Deferred tax adjustments 1,922 1,879 Total Tier 1 capital 742,129 742,086 Tier 2 capital Collective impairment allowance/ (2009: General allowance) 62,674 52,597 Total Tier 2 capital 62,674 52,597 Capital base 804,803 794,683 Core capital ratio 17.2% 20.6% Risk-weighted capital ratio 18.7% 22.0% The capital ratios have been computed in accordance with the Capital Adequacy Framework for Islamic Banks (CAFIB). Breakdown of risk-weighted assets: 30 Sep 2010 31 Dec 2009 Principal Risk-weighted Principal Risk-weighted Total RWA for credit risk 6,133,967 3,906,900 5,041,611 3,264,777 Total RWA for market risk - 65,051-24,658 Total RWA for operational risk - 342,290-315,695 6,133,967 4,314,241 5,041,611 3,605,130 18
26 Commitments and Contingencies The table below shows the contract or underlying principal amounts, positive fair value of derivative contract, credit equivalent amounts and risk weighted amounts of unmatured off-balance sheet transactions as at balance sheet date. The underlying principal amounts indicate the volume of business outstanding and do not represent amounts at risk. Positive fair value of Credit Risk Principal derivative equivalent weighted amount contracts amount * amount * 30 Sep 2010 Direct credit substitutes 76,105-76,105 75,442 Transaction-related contingent items 22,335-11,167 9,702 Short-term self-liquidating traderelated contingencies 16,653-3,331 1,812 Irrevocable commitments to extend credit: - Maturity not exceeding one year 847,096 - - - - Maturity exceeding one year 56,102-28,051 21,817 Unutilised credit card lines 521,899-104,380 78,285 Sell and buy back agreement 152,548-152,548 152,548 Equity related contracts - Less than one year 15,560-934 187 - One year to less than five years 93,056 9,437 16,882 3,376 1,801,354 9,437 393,398 343,169 Note 15 Positive fair value of Credit Risk Principal derivative equivalent weighted amount contracts amount * amount * 31 Dec 2009 Direct credit substitutes 26,018-26,018 25,942 Transaction-related contingent items 12,325-6,163 6,064 Short-term self-liquidating traderelated contingencies 49,733-9,947 9,850 Irrevocable commitments to extend credit: - Maturity not exceeding one year 722,787 - - - - Maturity exceeding one year 51,530-25,765 24,657 Unutilised credit card lines 506,940-101,388 76,041 Sell and buy back agreement 165,757-165,757 165,757 Equity related contracts - Less than one year 80,720 2,804 7,647 1,528 - One year to less than five years 64,190 7,433 12,569 2,515 1,680,000 10,237 355,254 312,354 Note 15 * The credit equivalent and risk weighted amounts were computed using credit conversion factors and risk weighting rules as per Bank Negara Malaysia guidelines (including the temporary (until 31 December 2010) measure related to credit conversion factor for undrawn facilities) and based on the Basel 2 Standardised Approach. 19
27 Profit Rate Risk The Bank is exposed to various risks associated with the effects of fluctuations in the prevailing levels of market profit rates on its financial position and cash flows. The following table summarises the Bank's exposure to the profit rates risk. The assets and liabilities at carrying amount are allocated to time bands by reference to the earlier of the next contractual repricing dates and maturity dates. Non-trading book Effective Up to >1-3 >3-12 1-5 Over 5 Non-profit Trading profit 30 Sep 2010 1 month months months years years sensitive book Total rate % ASSETS Cash and short-term funds 1,217,881 - - - - 34,685-1,252,566 2.67 Financial assets held-for-trading - - - - - - 428,131 428,131 3.04 Financial investments available-for-sale - 29,999-296,160 - - - 326,159 3.06 Financing and advances - performing 1,744,465 468,415 171,786 1,431,444 183,470 93,472-4,093,052 8.11 - impaired * - - - - - 18,707-18,707 - Others - - - - - 80,297 9,828 90,125 - Total Assets 2,962,346 498,414 171,786 1,727,604 183,470 227,161 437,959 6,208,740 LIABILITIES AND SHAREHOLDERS' FUNDS Deposits from customers 1,678,582 617,227 444,828 11,796-347,858-3,100,291 1.94 Deposits and placements of banks and other financial institutions 512,107 514,625 896,044 20,062 - - - 1,942,838 1.94 Bills and acceptances payable - - - - - 3,451-3,451 - Others - - - - - 368,326 34,477 402,803 - Total Liabilities 2,190,689 1,131,852 1,340,872 31,858-719,635 34,477 5,449,383 Shareholders' Equity - - - - - 759,357-759,357 Total Liabilities and Shareholders' Equity 2,190,689 1,131,852 1,340,872 31,858-1,478,992 34,477 6,208,740 On-balance sheet profit sensitivity gap 771,657 (633,438) (1,169,086) 1,695,746 183,470 (1,251,831) 403,482 - Total profit sensitivity gap 771,657 (633,438) (1,169,086) 1,695,746 183,470 (1,251,831) 403,482 - * This is arrived at after deducting the individual allowance from impaired financing. 20
27 Profit rate risk (continued) Non-trading book Effective Up to >1-3 >3-12 1-5 Over 5 Non-profit Trading profit 31 Dec 2009 1 month months months years years sensitive book Total rate % ASSETS Cash and short term funds 676,262 - - - - 11,046-687,308 2.00 Financial assets held-for-trading - - - - - - 127,386 127,386 2.54 Financial investments available-for-sale 47,946 229,933-106,341 - - - 384,220 3.20 Financing and advances - performing 968,583 342,527 257,691 1,359,529 163,253 53,320-3,144,903 8.20 - non-performing * - - - - - 20,070-20,070 - Others - - - - - 417,891 10,898 428,789 - Total Assets 1,692,791 572,460 257,691 1,465,870 163,253 502,327 138,284 4,792,676 LIABILITIES AND SHAREHOLDERS' FUNDS Deposits from customers 1,453,661 273,918 418,223 1,619-324,990-2,472,411 1.80 Deposits and placements of banks and other financial institutions 98,658 782,557 607,426 22,266 - - - 1,510,907 1.90 Bills and acceptances payable - - - - - 3,298-3,298 - Others - - - - - 55,179 10,237 65,416 - Total Liabilities 1,552,319 1,056,475 1,025,649 23,885-383,467 10,237 4,052,032 Shareholders' Equity - - - - - 740,644-740,644 Total Liabilities and Shareholders' Equity 1,552,319 1,056,475 1,025,649 23,885-1,124,111 10,237 4,792,676 On-balance sheet profit sensitivity gap 140,472 (484,015) (767,958) 1,441,985 163,253 (621,784) 128,047 - Total profit sensitivity gap 140,472 (484,015) (767,958) 1,441,985 163,253 (621,784) 128,047 - * This is arrived at after deducting the specific allowance from non-performing financing. 21
28 Change in Accounting Policies and Prior Year Adjustments a) Change in Accounting Policies The adoption of the new FRSs and amendments to FRSs shown below during the financial period has resulted in the following changes in accounting policies: FRS 139, Financial Instruments: Recognition and Measurement Amendments to FRS 139, Financial Instruments: Recognition and Measurement, FRS 7, Financial Instruments: Disclosures and IC Interpretation 9, Reassessment of Embedded Derivatives IC Interpretation 9, Reassessment of Embedded Derivatives FRS 101, Presentation of Financial Statements 1) FRS 139, Financial Instruments: Recognition and Measurement Prior to FRS 139 coming into effect on 1 January 2010, BNM's revised Guidelines on Financial Reporting for Licensed Institutions issued on 1 January 2005 adopted certain principles in connection with the recognition, derecognition and measurement of financial instruments, including derivative instruments, and hedge accounting that are in line with FRS 139 principles. By adhering to the BNM guidelines, the Bank adopted these FRS 139 principles. Therefore, the adoption of FRS 139 on 1 January 2010 only impacted areas where the FRS 139 principles were previously not incorporated into BNM s Guidelines issued in 2005 and these areas are disclosed below: i) Impairment of Loans, Advances and Financing The Bank s financing impairment policy and allowance for impaired loans, advances and financing are in conformity with FRS 139 and the requirements of Bank Negara Malaysia's revised Guidelines on Classification and Impairment Provisions for Loans/Financing. In line with the Amendment to FRS 139 which relates to the transitional arrangement for the financial sector, BNM's Guidelines on Classification and Impairment Provisions for Loans/Financing issued on 8 January 2010 prescribes that banking institutions are required to maintain collective impairment allowances of at least 1.5% of total outstanding financing, net of individual impairment allowance. This is similar to the previous regulatory requirement whereby banking institutions are required to maintain general allowance provisions of at least 1.5% of total outstanding financing, net of specific allowance, with the exception that the determination of individual impairment allowances is required to be based on reasonable and welldocumented estimates of the net present value of the future cash flows that the banking institutions expect to recover. Previously, BNM allowed specific allowances to be made based on the number of days in arrears of the financing. Prior to 1 Jan 2010, the Bank s accounting policy relating to the classification of impaired financing and the assessment of individual impairment allowances (previously referred to as specific allowances) on impaired financing (previously referred to as non-performing financing) were already largely in line with the requirement of FRS 139. The main change upon full adoption of FRS 139 and BNM's revised Guidelines on Classification and Impairment Provisions for Loans/Financing from 1 January 2010 onwards is that BNM s previous requirement for additional individual impairment allowance for impaired financing more than 5 years and 7 years is no longer applicable under FRS 139 principles. In view of the above, there have been minimum changes to the opening retained profits as well as opening individual or collective impairment allowance balances. 22
28 Change in Accounting Policies and Prior Year Adjustments (continued) ii) IC Interpretation 9 on Reassessment of Embedded Derivatives IC Interpretation 9 on Reassessment of Embedded Derivatives requires embedded derivatives to be separated from the host contract and accounted for as a derivative if the economic characteristics and risks of the embedded derivative are not closely related to that of the host contract and the fair value of the resulting derivative can be reliably measured. The Bank s booking of embedded derivatives was already in line with this principle and hence, the implementation of IC Interpretation 9 has no impact on the Bank s financials. 2) FRS 101, Presentation of Financial Statements As a result of the adoption of the revised FRS 101, income statements of the Bank for the comparative 3rd quarter and nine months ended 30 September 2009 have been re-presented as a single statement of comprehensive income displaying components of profit and loss and other comprehensive income. All nonowner changes in equity which were previously presented in the statement of changes in equity are now included in the statement of comprehensive income as other comprehensive income. Since these changes only affect presentation aspects, there is no impact on earnings per ordinary share. When an entity applies an accounting policy retrospectively, FRS 101 requires presentation of a statement of financial position at the beginning of the earliest comparative period, in addition to statements at the end of the current period and at the end of the previous period. The changes to the statement of financial position as at 1 January 2009 are similar to that disclosed in the statement of financial position as at 31 December 2008 as disclosed in the audited financial statements for the year ended 31 December 2009. 3) FRS 7, Financial Instruments: Disclosures The adoption of FRS 7 during the financial period has resulted in some changes to the disclosure of financial instruments, whereby the disclosures are now made by categories of financial assets and liabilities. The disclosure of comparative figures in the statement of financial position as at 31 December 2009 and the income statement for the 3rd quarter and nine months ended 30 September 2009 have been restated to conform with the current period's presentation. Since these changes only affect the presentation of disclosure items, there is no impact on the financial results of the Bank for the comparative period. 23
28 Change in Accounting Policies and Prior Year Adjustments (continued) b) Adjustments due to Change in Accounting Policies 1) FRS 139, Financial Instruments: Recognition and Measurement The opening retained earnings of the Bank has been adjusted to reflect the recognition of discount unwind of individual impairment not previously recognised in the Bank s financial statements prior to 1 January 2010 even though the Bank has adopted the discounted cash flow method to determine specific allowance required on non-performing financing. Statement of financial position as at 1 January 2010 Reserves: As restated RM'000 As previously stated RM'000 Retained profit 40,136 40,103 29 Performance Review The Bank recorded a profit before taxation and zakat of RM30.7 million for the nine months ended 30 September 2010, a decrease of RM19.6m or 39.0% against history. The lower profit before taxation and zakat was mainly due to the investment made for the expansion of the business, the opening of new branches and the installation of additional offsite self-service terminals. Total income derived from the investment of depositors and shareholders' fund increased by 15.4% to RM278.3 million. This was mainly derived from higher income from financing/ advances and net fees and commission. Net financing income was higher arising from a 48.9% increase in net financing/ advances balance coupled with a 75 basis point increase in the Overnight Policy Rate (OPR). Net fees and commission increased primarily due to higher credit card fees on increased cardholder spending, and arrangement fees received. Balance sheet size increased by RM1.5 billion or 31.9% against 30 September 2009, mainly on higher financing/ advances and deposits. An expansion in branch network coupled with a wider range of Islamic products and services offered contributed to the increase in financing/ advances and deposits. 24
30 Business Prospects The Malaysian economy registered a robust growth of 8.9% in the second quarter of the year, driven mainly by healthy domestic demand and stronger trade activities. However, the pace of recovery is more subdued in the second quarter in comparison to the record double digit growth of 10.1% in the first quarter as the economy moves into a more normalised phase. Owing to growing concerns over the vulnerable Euro area economies and slower than anticipated growth from the larger emerging markets, the pace of the region's economic rebound is expected to continue to ease, although full year-on-year growth is likely to remain strong. Nevertheless, the Malaysian government is committed to creating a conducive environment to stimulate national economic growth and to sharpen the competitive edge of Malaysia. Under the 10th Malaysia Plan ("10 MP"), the government has allocated RM230 billion as development expenditure. A number of high impact projects have been earmarked for implementation under the 10 MP, and this could generate more economic activity and build up the demand for credit and the need for other banking services. These, along with further liberalisation efforts in the financial services sector will attract more investors in the long run. The rising profit rate environment also bodes well for the Bank from a net profit margin perspective. The focus for the remaining part of 2010 will be on growing the Premier and Advance proposition. "Advance" is a new proposition launched in the second half of 2010 to cater to the newly emerging mass affluent market. It complements the existing Premier proposition that targets the internationally-oriented mass affluent segment. Wealth management services will also remain a key area of attention, together with the cross selling of various banking products to the Bank's existing customers by leveraging on the HSBC brand name, global reach and connectivity. The Bank will continue to expand its business and widen its geographical reach by opening more branches, together with offsite Self Service banking terminals, in 2010. To date, the Bank has 8 branches and there are plans to open more branches nationwide within the next two to three years. Barring unforeseen circumstances, the Bank expects to register a satisfactory performance for the current financial year. 31 Comparative Figures Restatement of Comparative Figures The presentation and classification of items in the current financial statements is consistent with the previous financial period except for the following: Reclassification/restatement to conform to current period's presentation (i) Condensed Statement of Financial Position as at 31 December 2009 (previously referred to as balance sheet) Financing and Advances As restated RM'000 As previously stated RM'000 By sector Manufacturing 788,832 783,245 Purchase of landed property: Residential - 77,981 Non-residential - 7,337 Purchase of securities - 1,356 Purchase of transport vehicles - 507 Consumption credit - 1,201,483 Household - Retail 1,283,077 - By purpose Purchase of landed property: Residential 77,981 - Non-residential 7,337 - Purchase of securities 1,356 - Purchase of transport vehicles 94 - Purchase of fixed assets excluding land & building 235,009 - Consumption Credit 1,201,896 - Construction 54,486 - Working Capital 1,602,143 - Other Purpose 72,651-3,252,953-25
31 Comparative Figures (continued) Restatement of Comparative Figures (continued) (ii) Statement of comphrehensive income for the third quarter and nine months ended 30 September 2009 (previously referred to as income statement) 3rd Quarter Ended Year-To-Date ended As restated As previously As restated As previously stated stated a) Income Derived from Investment of Shareholders' Fund Finance income and hibah: - Profit earned other than recoveries from impaired financing 11,135 11,424 31,261 31,861 - Recoveries from impaired financing 289-600 - Money at call and deposit with financial institutions 1,159 1,159 3,183 3,183 12,583 12,583 35,044 35,044 Other operating income Fees and commission 6,260 6,526 16,188 16,804 Net gains from dealing in foreign currency - - 143 143 Net gains from sale of held-for-trading securities and other financial instruments - - 97 97 Net unrealised gains from revaluation of trading securities - - 203 203 Net profit earned from trading securities - - 395 395 Shared-service fees from holding company 662 662 1,474 1,474 Net gains on disposal of equipment - - 56 56 Other income 32 32 113 113 6,954 7,220 18,669 19,285 19,537 19,803 53,713 54,329 The above fees and commissions were derived from the following major contributors: Service charges and fees 2,881 2,837 8,448 8,335 Cards 2,425 2,745 4,729 5,484 Agency fees 600 600 1,841 1,841 b) Other Overheads and Expenditures Promotion and marketing related expenses Advertising and promotion 2,718 2,718 10,579 10,579 Establishment related expenses Depreciation of equipment 388 388 1,078 1,078 Amortisation of intangible assets 183 183 454 454 Information technology costs (63) (63) 332 332 Hire of Equipment 92 92 107 107 Rental of premises 998 998 2,442 2,442 Others 127 127 553 553 1,725 1,725 4,966 4,966 General administrative expenses Shared-service fees to immediate holding company 19,692 19,692 58,939 58,939 Auditors' fees Statutory audit 13 13 40 40 Non-audit services - - - - Professional fees 196 466 972 1,561 Others 297 293 2,327 2,354 20,198 20,464 62,278 62,894 24,641 24,907 77,823 78,439 26