Commercial Banking

Assignment 1 Executive Summary The purpose of this report is to treasure the carry outance of some(prenominal) Hong Leong brim and its chum swear RHB imprecate for the pecuniary course of study cease in 2010. The DuPont simulation is use to set aside the information on the trusts liquidity, reach business leader, cleverness and leverage status that allows fiscal analyst to evaluate on the performance of the desire as a result of the changes of these factors. A trend comparison for division 2010, 2009 and 2008 is conducted and evaluated its respective poises and a nonher(prenominal) mo lettuceary info.The peer comparison of financial ratios amidst RHB dep genius & angstrom unit Hong Leong coast is evaluated and analysed to collide with which bank performs bettor in 2010. The former(a) key ratios ar as substantially as calculated in for deep compendium on to see how hale these cardinal banks in Malaysia perform in 2010. In addition, its recogni tion encounter that includes the endangerment direction and its policy of both banks is then evaluated and comp bed to see which bank manages its ac realiseledgement jeopardy properly.Finally, this report provides an overview of the performance of both RHB edge and Hong Leong posit for the financial social class ended in 2010 and conclude which bank perform interrupt in enclosures of various financial ration and management of quote jeopardize. II II Assignment 1 Part A banking company Performance Question 1 Dupont exemplar a. Dopont Model The DuPont model analysis is a common form of financial statement analysis and this model provides information on the banks liquidity, profitability, energy and leverage status that allows financial analyst to evaluate on the performance of the steadfastly as a result of changes in one or to a greater extent(prenominal) of these actors (Milbourn & antiophthalmic factor Haight, 2005). According to Narayanan (2010), the DuPont model provides a starting point to checker the strength and weakness of the sure. It is also a very powerful financial excessivelyl to assist financial analyst, regionholders, investors and bankers in lowstanding the profitability of the firm and a tool that evaluate the firms financial statements by comparing the relationships within the in amaze statement and balance sheet, or between the two statements. (Milbourn & Haight, 2005). The DuPont Model starts with the re let go of of legality ( roe).The ROE is a plastered measure on how well the management of the bank creates respect to the shareholders (Pinsent, 2010). It is also a true(p) starting point in the analysis of a banks financial condition. ROE is calculated by dividing the cyberspace income by arrive equity (Gup, Avram, Beal, Lambert & Kolari, 2007). The formula is as follows. ROE= Net income justness According to Gup et at, (2007), the ROE ratio is equal to the devolve of additions (ROA) ratio sequences the Leverage multiplier that shows the dollar bill make outity of additions that are financed by each dollar of the equity. The leverage multiplier is one indicator of financial leverage.ROE=ROA x Leverage Multiplier Net Income standdor = Net Income heap up pluss x thoroughgoing As rotarys loveliness Leverage multiplier shows the extent to which the bank relies on debt financing. The high(prenominal) the leverage multiplier, the more debt the bank is carrying. Leverage Multiplier= jibe additionsEquity The fork out of Assets (ROA) measures the bank profits as a percent of its pluss and also measures the ability of the firm to use the real financial resources of the bank to dedicate revenue enhancement revenue. It is usually used to evaluate bank management (Gup et al, 2007). ROA is calculated by dividing engagement income y total assets. ROA= Net IncomeTotal Assets In the DuPont model analysis, the ROA is expended into a nonher par Net IncomeTotal Assets = revenueTo tal Assets x Net IncomeRevenue Thus the DuPont model translates the ROA equation into the chase ROA=Asset Utilisation x Net Profit Margin The moolah gross profit ratio shows how oftentimes profit the bank makes for every $ 1. 00 it gene evaluate from the revenue. Generally, the high the ratio, the better the net b recite. In order to obtain more revenue, well-nigh banks will want to reduce the net income to achieve a higher(prenominal)(prenominal)(prenominal)(prenominal) net borderline ratio.Net Margin= Net IncomeRevenue The asset utilisation shows the get of income the bank gene pass judgmentd for every dollar worth of the assets available. This shows the banks efficiency in utilising the assets. Basically, the higher the asset turnover, the better the firm use the assets. Asset Turnover= RevenueTotal Assets In order for the bank to add-on the ROE, banks need to ontogenesis their acknowledgment jeopardy this rotter be done by providing more bestows to customers and su bsequently, the bank will earn more income. This will in turn increase the ROA and the same time increases the ROE.Limitations of the Dupont model analysis * It is trading floord on historying numbers, which are basically not reliable. * it does not include the be of Capital. * Garbage in, garbage out. Assumptions of the DuPont method * Accounting numbers are reliable. b. Dopont Model Analysis i. & ii. Trend Comparison of Hong Leong and RHB (2008, 2009 & 2010) Hong Leong avows data 2010 2009 2008 RM000 RM000 RM000 Revenue af whitee income 2,592,586 2,937,002 3,064,785 Non- come to income 506,979 511,537 501,067 Total 3,099,565 3,448,539 3,565,852 ope reckon(a) cost vex expense 1,209,792 1,579,883 1,688,293 Non- affair expense 831,139 806,030 786,194 Total 2,040,931 2,385,913 2,474,487 Net profit 767,817 659,678 838,874 Total assets 77,730,208 70,732,513 69,992,756 Equity 5,815,063 5,319,288 4,923,133 RHB curses Data 2010 RM000 Revenue enliven income 4,530,637 Non- wager income 722,818 Total 5,253,455 run Cost rice beer Expense 1,811,153 Non- engage Expense 1,302,007 Total 3,113,160 Net profit 1,294,437 Total assets 105,179,231 Equity 8,397,474 Dupont Model of Hong Leong imprecate 2010 2009 2008 redeem On Equity Net incomeEquity RM767,817,000RM5,815,063,000= 13. 20% RM659,678,000RM5,319,288,000= 12. 40% RM838,874,000RM4,923,133,000= 17. 04% Leverage MultiplierTotal AssetsEquity RM77,730,208,000RM5,815,063,000=13. 37times RM70,732,513,000RM5,319,288,000= 13. 30times RM69,992,756,000RM4,923,133,000= 14. 22times regaining On AssetsNet IncomeTotal Assets RM767,817,000RM77,730,208,000= 0. 99% RM659,678,000RM70,732,513,000= 0. 93% RM838,874,000RM69,992,756,000= 1. 20% Asset employmentRevenueTotal Assets RM3,099,565,000RM77,730,208,000= 3. 9% RM3,448,539,000RM70,732,513,000= 4. 88% RM3,565,852,000RM69,992,756,000= 5. 10% Net delimitationNet incomerevenue RM767,817,000RM3,099,565,000= 24. 77% RM659,678,000RM3,448,539,000= 19. 13% RM838,874,000RM3,565,852,000= 23. 53% Dupont Model of RHB beach 2010 Return On Equity Net incomeEquity RM1,294,437,000RM8,397,474,000=15. 41%Leverage MultiplierTotal AssetsEquity RM105,179,231,000RM8,397,474,000=12. 53times Return On AssetsNet IncomeTotal Assets RM1,294,437,000RM105,179,231,000=1. 23% Asset UtilizationRevenueTotal Assets RM5,253,455,000RM105,179,231,000=4. 9% Net gross profitNet incomerevenue RM1,294,437,000RM5,253,455,000=24. 64% c. Analysis and Discussion Trend comparison of Hong Leong depose Ratio 2010 2009 2008 Net margin 24. 77% 19. 13% 23. 53% Asset utilisation 3. 99% 4. 88% 5. 10% Return on assets 0. 99% 0. 93% 1. 20% Leverage multiplier 13. 37times 13. 30times 14. 22times Return on equity 13. 20% 12. 40% 17. 04% Hong Leong cants net margin is higher in twelvemonth 2010 (24. 77%) compared to the year 2009 (19. 13%) and year 2008 (23. 53%). It path that operating(a) cost are relatively frown in year 2010 compared to year 2009 and year 2008.Operating costs in the year 2010, 2009 and 2008 are RM2,040,931,000, RM3,448,539,000 and RM2,474,487,000 respectively. This indicates that operating costs are well controlled by Hong Leong brim in 2010 compared to 2009 and 2008. Thus this shows that the bank run their operations effectively in 2010 that change magnitude its profitability. Hong Leong Banks asset utilisation is bring down in year 2010 (3. 99%) compared to the year 2009 (4. 88%) and 2008 (5. 10%). It lessen constantly from year 2008 to 2010. The decline in the figures shows that beginning in the year of 2009, the bank did not utilise much of its assets to generate more revenue.Therefore revenue was decreasing from 2008 to 2009. Revenue for the year 2010, 2009 and 2008 are RM3,099,565,000,RM3,448,539,000 and RM3,565,852,000. This shows that the bank well utilised the assets to generate revenue in 2008 compared to 2010. Hong Leong Banks make pass on assets is debase in year 2010 (0. 99%) compared to the year 2009 (0. 93%) a nd 2008 (1. 20%). This shows that Hong Leong Bank did not do well in managing and utilising its asset base in 2010. Hong Leong Banks leverage multiplier decreased from the year 2008 (14. 22times) to year 2009 (13. 30times) and change magnitude back in year 2010(13. 7times).This implies that Hong Leong Bank does not depend too much on debt financing in their activities and carried less debt in their operations in 2009 compared to year 2010 and 2008. Thus, Hong Leong Bank was exposed to more adventure in 2008 compared to year 2010. Hong Leong Banks return on equity decreased from year 2008 (17. 04%) compared to year 2009 (12. 40%) and increased back in year 2010 (13. 20%). This implies that it did not manage and utilise its equity base and thereof the investors did not get a better return from the Hong Leong Bank in 2010.Overall, Hong Leong Bank performance on profitability was better in 2008 compared to the year 2009 and 2010. Peer comparison Ratio Hong Leong Bank RHB Bank Net mar gin 24. 77% 24. 64% Asset utilisation 3. 99% 4. 99% Return on assets 0. 99% 1. 23% Leverage multiplier 13. 37times 12. 53times Return on equity 13. 20% 15. 41% Hong Leong Banks net margin (24. 77%) is higher than RHB Banks (24. 64%). It means that RHB Banks operating costs are relatively higher. RHB Banks operating costs are RM3,113,160,000 whereas Hong Leong Banks operating costs are RM2,040,931,000.Thus, RHB Banks operating costs are higher by RM1,072,229,000. This indicates that operating costs are well controlled by Hong Leong Bank compared to RHB Bank. RHB Banks asset utilisation (4. 99%) is higher than Hong Leong Banks (3. 99%). This shows that RHB Bank used near effectively of its assets to generate more revenue than Hong Leong Bank. RHB Banks revenue is RM5,253,455,000 which is higher than Hong Leong Banks revenue which is RM3,099,565,000. Hong Leong Banks return on assets is 0. 99% which is slightly set about than RHB Banks return on assets which is 1. 23%.This can be imp lied that Hong Leong Bank did not manage and utilise its assets base better than RHB Bank during operations to generate revenue. However, both banks generated low return on the basis of their assets. With total assets of RHB Bank is RM105,179,231,000, it generated revenue of RM5,253,455,000 whereas Hong Leong Banks total assets is RM77,730,208,000 and it generated revenue of RM3,099,565,000. Even though, RHB Bank has assets of 1. 35times more than Hong Leong Bank, its return on assets is still low.Thus Hong Leong Bank managed its assets better than RHB Bank. Hong Leong Banks leverage multiplier (13. 7times) is higher than RHB Banks (12. 53times). Hong Leong bank has leverage multiplier of 0. 84times more compared to RHB Bank. This implies that RHB Bank does not depend too much on debt financing in their activities and carries less debt in their operations. Thus, Hong Leong Bank is exposed to more jeopardize than RHB Bank. Hong Leong Banks return on equity is 13. 20% which is lower than RHB Banks 15. 41%. RHB Bank has a higher ROE because possibly the bank does not rely too much on debt financing and offers a high return to shareholders of the bank. Thus, shareholders of RHB Bank will be happy and chit with RHB Bank.Shareholders of Hong Leong Bank may sell its shares and leave the bank. Generally, the boilers suit financial performance of Hong Leong Bank is not very well in comparison with RHB Bank (peer bank). It is possible that Hong Leong Banks objectives and strategies are divergent from RHB Banks. Question 2 Hong Leong Banks data of 2010 provoke earning asset 1 RM000 relys and placements with banks and some otherwise financial institutions 7,004,664 Securities held at fair esteem through profit or loss 6,703,224 Available-for-sale securities 3,859,367 Held-to-matureness securities 7,042,610 Loans, advances and financing 33,589,093Other assets 2,014,821 Total 60,213,779 Earning assets 2 liaison Income Assets Deposits and placements with banks and other financial institutions 7,004,664 Securities held at fair re nourish through profit or loss 6,703,224 Available-for-sale securities 3,859,367 Held-to- adulthood securities 7,042,610 Loans, advances and financing 33,589,093 Other assets 2,014,821 Non- invade Income Assets investing in subsidiary companies (Note 31) earning dividend 714,092 Investment in associated company (Note 31) earning dividend 946,505 Total 61,874,376 matter to smooth assets 3 property and short- full consideration capital 13,421,408 Deposits and placements with banks and other financial institutions 7,004,664 Available-for-sale securities 681,619 Held-to-maturity securities 1,705,674 Loans, advances and financing 30,712,038 Total 53,525,403 Interest military posture liabilities 4 Deposits from customers 63,239,050 Deposits and placements of banks and other financial institutions 3,791,129 Bills and word senses look payable 285,366 Other liabilities 3,890,295 Total 71,205,840 Int erest sensitive liabilities 5 Deposits from customers 54,798,922Deposits and placements of banks and other financial institutions 3,784,376 Bills and acceptances payable 25,453 Total 58,608,751 Liquid assets 6 Cash and short- verge gunstocks 13,928,247 Deposits and placements with banks and other financial institutions 7,004,664 Loans, advances and financing (Note 8) 9,057,329 Available for sales securities 3859367 Total 33,849,607 Deposits 7,004,664 Shareholders fund = Total equity 5,815,063 Net-write offs 7 202,219 NOTES 1 Interest earning asset are assets that earns care income. (Note 28 of pg113 of Hong. Leong Bank Annual circular statement 2010) Earning assets Income earning assets held by a bank typically include spare-time activity bearing balances, investment securities and brings. (Note 28 of pg113 & Note 31 of pg115 of Hong Leong Bank Annual bailiwick 2010) 3 Interest sensitive assets are the dollar harbor of assets that all mature or can be repriced within within a selected time period such as one year. 4 Interest bearing liabilities are those liabilities that have to pay stakes. 5 Interest sensitive liabilities are the dollar repute of liabilities that either mature or can be reprised within a selected time period usually of one year.Liquid assets are unpledged, martable short term securities that are classified as available for sale, plus federal funds sold and securities purchased under musical arrangement to resell, a liquid asset can be easily and pronto reborn into notes with minimum loss. 7 Net Write Offs is the measuring rod written off under the assets of loans, advances and financing. (Note 8of pg95 of Hong Leong Bank Annual track 2010) NOTES 8 Interest Sensitive Assets RM000 13,421,408 7,004,664 681,619 1,741,674 30,712,038 Interest Sensitive Liabilities RM000 54,798,922 3,784,376 25,453 Interest Sensitive Assets RM000 3,421,408 7,004,664 681,619 1,741,674 30,712,038 Interest Sensitive Liabilities RM000 54, 798,922 3,784,376 25,453 RHB Banks data of 2010 Interest Earning asset 1 RM000 Loans, advances and financing 71,125,558 Money at call and cling placements with banks and other financial institutions 1,539,648 Securities purchased under resale bargain 276,407 Financial assets held-for-trading 129,583 Financial investments available-for-sale 8,143,221 Financial investments held-to-maturity 8,143,221 Total 89,357,638 Earning assets 2 Loans, advances and financing 71,125,558Money at call and deposit placements with banks and other financial institutions 1,539,648 Securities purchased under resale summent 276,407 Financial assets held-for-trading 129,583 Financial investments available-for-sale 8,143,221 Financial investments held-to-maturity 8,143,221 Total 89,357,638 Interest sensitive assets 1 Cash and short-term funds 10,270,874 Securities under resale agreement 276,398 Deposits and placements with banks and other financial institutions 777,779 Financial investment available -for-sale 1107052 Held-to-maturity securities 3833825Loans, advances and financing 52741914 Total 69,007,842 Interest bearing liabilities 4 Deposits and placements of banks and other financial institutions 6,158,453 Deposits from customers 80,567,577 Subordinated responsibilitys 3,018,157 Recourse obligation on loans sold to Cagamas Berhad 818,503 Hybrid Tier I Capital Securities 605,407 Long term borrowings 819,362 Others liabilities 868,165 Total 92,855,624 Interest sensitive liabilities 2 Deposits from customers 63,270,532 Deposits and placements of banks and other financial institutions 5558376 Bills and acceptances payable 2934533Recourse obligation on loans sold to Cagamas Berhad 147030 Long term borrowings 817127 Total 72,727,598 Liquid assets 3 Cash and short-term funds 11093561 Securities purchased under resale agreements 276,407 Deposits and placements with banks and other financial institutions 782,462 Financial assets held-for-trading 119,374 Financial invest ment available-for-sale 1176035 Financial investment held-to-maturity 3854749 Loans, advances and financing 14124170 Other assets 88835 Derivative assets 190637 Total 31,706,230 Deposits 1,539,648Shareholders fund = Total equity 8,397,474 Net-write offs 7 1,033,573 NOTES 1, 2, 3 Please refer to appendix. Hong Leong BankRM000 RHB BankRM000 Interest earning assets 60,213,779 89,357,638 Interest bearing liabilities 71,205,840 92,855,624 Earning Assets 61,874,376 89,357,638 Interest sensitive assets (RSA) 53,525,403 69,007,842 Interest sensitive liabilities (RSL) 58,608,751 72,727,598 Liquid assets 33,849,607 29,990,240 Shareholders fund 5,815,063 5,815,063 Net-write offs 202,219 1,033,573 Operating Income 3,099,565 5,253,455Operating Expense 2,040,931 3113160 Other key indicators for the year ended 2010 Bank efficiency Hong Leong Bank RHB Bank force ratioOperating expenses Operating income RM2,040,931,000RM3,099,565,000= 65. 85% RM3,113,160,000RM5,253,455,000= 59. 26% Cost to assets ratiosOperating expenses Total assets RM2,040,931,000RM77,730,208,000= 2. 63% RM3,113,160,000RM105,179,231,000= 2. 96% Efficiency ratio measures the changes of costs in relation to income. Hong Leong Bank has an efficiency ratio of 65. 85% while RHB Bank is one with the lower which is 59. 26%.This implies that Hong Leong Banks rate in increasing the operating income is at lower rate compared to RHB Bank. In terms of rate of increase in operating income, Hong Leong has the lower efficiency compared to RHB. Cost to assets ratio is used to measure the costs incurred in relation to the assets size. RHB Bank has a higher cost to assets ratio that is 2. 96% compared to Hong Leong Bank that has a figure of 2. 63%. Therefore in term of cost of control relative to the total assets owned, Hong Leong is more economical than RHB Bank. Interest differentials Hong Leong Bank RHB BankNet interest incomeInterest bring in -Interest expense RM2,592,586,000 -RM1,209,792,000= RM1,382,794,000 R M4,530,637,000-RM1,811,153,000= RM2,719,484,000 % of interest margininterest earned interest expenses Earning assets RM2,592,586,000-RM1,209,792,000RM61,874,376,000= 2. 23% RM4,530,637,000-RM1,811,153,000RM89,357,638,000= 3. 04% %interest spread(interest earned/interest earning assets) (interest expense/ interest bearing liabilities) (RM2,592,586,000/RM60,213,779,000)-(RM1,209,792,000/RM71,205,840,000)= 2. 1% (RM4,530,637,000/RM89,357,638,000)-(RM1,811,153,000/RM92,855,624,000)= 3. 12% Net interest income refers the difference between revenue that is generated from the banks assets and expenses associated with paying out its liabilities. In the table above, RHB Banks net income is RM2,719,484,000 which is higher than Hong Leong Bank which have a figure of RM1,382,794,000. This means that RHB Bank has higher excess revenue and interest income after(prenominal) deducting interest paid on deposit from interest earned on assets. serving interest margin shows the dollar difference bet ween interests earned and interest expense, as a percentage of earnings assets. Hong Leong Banks% interest margin is 2. 23% which is lower than RHB Bank which is 3. 04%. This implies that RHB Bank made a better investment than Hong Leong Bank payable to higher percentage interest margin. Percentage interest spread refers to the difference in borrowing and lending rates of financial institutions (such as banks) in nominal terms. RHB Banks % interest spread is 3. 12% which is higher than Hong Leong Banks 2. 23%. find management Hong Leong Bank RHB BankInterest rate dangerinterest sensitive assets interest sensitive liabilities RM53,525,403,000RM58,608,751,000= 0. 91 RM69,007,842,000RM72,727,598,000= 0. 95 trust luck net write-offs total assets RM202,219,000RM77,730,208,000= 0. 26% RM1,033,573,000RM105,179,231,000= 0. 98% Liquidity risk liquid assets/total asset liquid assets/deposits RM33,849,607,000/RM77,730,208000= 0. 44RM33,849,607,000/RM7,004,664,000= 4. 83 RM29,990,240,000/RM 105,179,231,000= 0. 29RM29,990,240,000/RM1,539,648,000= 19. 48 Capital risk shareholders funds total assets RM5,815,063,000RM77,730,208,000= 7. 48% RM8,397,474,000RM105,179,231,000= 7. 8% Interest Sensitivity ratio measures the interest rate risk and it measures the level of repricing irregularities between the banks assets and liabilities. RHB bank has an interest sensitivity ratio of 0. 95 while Hong Leong has 0. 91 which is slightly lower than RHB Bank. This implies that RHB Bank can replace assets with higher yielding assets quicker than transposition the low cost deposits with more funds compared to RHB. opinion risk refers to risk of loss of principal due to the borrowers failure to repay the loans or otherwise meet the contractual obligation. RHB bank has a higher credit rating rating risk which stands at 0. 8 % compared to Hong Leong that has a lower figure of 0. 26%. This shows that Hong Leong is better in managing its credit risk compared to RHB. Liquidity ratio is use d to measure the ability of the bank to repay off its short term obligations. RHB Bank has lower liquidity ratios of 0. 29 while Hong Leong has a higher ratio of 0. 44. This shows that Hong Leong has higher liquid assets to meet short term obligation and able to repay all short term debt in time compared to RHB Bank. The neat risk ratio is used to calculate the smashing risk and it measures the financial stability of the bank.RHB Bank has a higher simple capital ratio that has a figure 7. 98% compared to Hong Leong bank that has a range of 7. 48%. This implies that RHB is well protected against any operating losings incurred than Hong Leong. Overall, in terms of risk management RHB Bank is performing well compared to Hong Leong Bank for the year ended 2010. Question 3 Comparison of forms of loans between RHB and Hong Leong Bank OverdraftsTerm loans/financing- housing and shop loans/financing- Syndicated term loans/financing- Hire purchase receivables- Lease receivables- Other ter m oans/financingCredit/charge card receivablesBills receivableTrust receiptsClaims on customers under acceptance creditsBlock discountingRevolving creditStaff loans/financingFloor stockingOther loans/financingUnearned interest and incomeGross loans, advances and financingFair value changes arising from fair value hedgesUnamortised fair value changes arising from terminated fairvalue hedgesAllowance for impaired loans and financing-individual loss allowance-collective impairment allowance-general allowance-specific allowanceAllowance for bad and doubtful debts and financing- specific- generalTotal net loans, advances and financing RHB Bank (RM000)5,976,56915,908,732835,5889,322,667-29,854,4431,644,4651,418,203325,1774,130,205-3,491,071336,5281,56973,245,217-(682,522)(1,437,137)-71123,989 Hong Leong Bank (RM000)2,086,55016,933,8161,458,6333,284,687-1,653,6902,017,519211,01992,9823,184,6968,2181,219,78096,668-44,390(613,549)31,679,09928,3858,714(306,807)(471,305)30,938,086Credit risk is the risk of financial loss due to a borrower or counterparty being unable or unwilling to economize on its payment obligations to the Bank, which leads to a loss of revenue and the principal count. It arises principally from lending, trade finance and treasury activities (Hong Leong Bank Annual Report 2010 pg. 150). found on the above table shows the comparison of the total amount of loans for Hong Leong Bank and RHB Bank for the financial year ended 2010. RHB Bank has the highest number of loans that stands at RM71,125,558,000 while Hong Leong Bank has a total of RM 33,589,093,000. However, based on the credit risk ratio RHB Bank has a higher credit risk which stands at 0. 98 % compared to Hong Leong that has a lower figure of 0. 26%.This shows that Hong Leong is better in managing its credit risk compared to RHB Bank RHB Bank has 2. 1times more loans than Hong Leong Bank, hardly its credit risk is 3. 76times more than Hong Leong Bank. It implies that Hong Leong is better i n managing its credit risk and loan portfolio because closely borrowers able to pay back the loan to the bank. Therefore, Hong Leong provided the best of the credit risk type. In order for the bank to increase and strengthen the risk management practices, RHB Bank holds to maintain the credit reference of its loan portfolios, improve cost strong suit, and ensure the liquidity and capital stay strong throughout the financial year in 2010.Therefore, RHB Bank manages risk through clearly defined guidelines that are approved by the gore of Directors, through a framework of established control and reporting process. Hong Leong Bank also gives a strong priority for managing effectively in credit management. It is also managed by high- association personal with high level review undertaken by the Management Credit charge under the supervision of the Board Credit Supervisory Committee. The bank integrated risk management structure is akin to RHB Bank whereby credit risk framework th at is compliant with Bank Negara Malaysias guidelines on outmatch Practices for the Management of Credit assay.The Group stake Management Committee (GRMC) had been established by RHB Bank for risk oversight within the bank. Among the commissionings of this group are namely the Group Credit Risk Management Committee (GCRMC), Group Operational Risk Management Committee (GORMC) and Group Assets and Liabilities Management Committee (GALCO) assist the GRMC in managing credit risk, in operation(p) risk as well as market and liquidity risk. The committee ensures the development and implementation of risk policies as well as the effectiveness of policies. Among the exposure of credit risk in RHB Bank may be categorized as primary exposure. Loans, advances and financing are the credit risk that arises in the primary exposure.Most of the lending activities in the bank are direct by the Groups Credit Policies and Guidelines, in line with Best Practices in the Management of Credit Risk, unfreezed by Bank Negara Malaysia. The credit risk policy includes an overview of the lending organisation, and the responsibilities of the parties in the organisation whereby the Board have a loan committee that oversees major new loan and renewals and the performance of the loan portfolio (Gup et al, 2007). Example, Hong Leong will be redeveloping a new credit risk establishment for corporate and commercial borrowers while for the retail segment, the bank has implemented a credit activity and behavioural scoring system in order to improve the Banks ability to control credit losings within predictive ranges and achieve a well balanced portfolio.This is uniformity to the Basel II that RHB Bank is also practising whereby every bank requires to hold competent capital in order to fulfil the minimum capital enough of the bank. This is also supported by Hassan & Muhammad, (2007) whereby bank loans are the most largest and obvious credit risk. Therefore the Basel II is required s o that most banks will know how much capital they must hold. The Banks credit risk management process is documented and processed In the Credit Manual. One of the functions of the Credit Manual that is introduced by Hong Leong Bank is to set out the lending policies, lending authorities, credit risk rating, credit reviews, collateral, credit administration and security documentation, and timely rehabilitation and restructuring of problematic and delinquent accounts.Apart from that, this is to ensure that structures are there to maintain to enhance the Banks risk assessment capabilities in key areas of credit that includes sound credit policies and procedures, quality credit approvals, appropriate risk measurement. ARHB Bank does not have this Credit Manual scarce they form a second line disproof that formulate the risk management policies. The function of an internal audit is to provide independent reviews of the quality of the loans (Gup et al, 2007). Based on the Hong Leong Bank Annual Report (2010), it states that Internal Audit conducts independent post to reviews on the financial statements and the capital of the bank.This is to ensure that the qualities of credit risk and approval standards are in symmetry with the credit standards and the lending policies and directives established and approved by the Banks management and Board of Directors. Question 4 Conclusion In conclusion, the performance of Hong Leong Bank for the financial year ended in 2010 is not as good as its peer bank RHB Bank. This is due to that the ROE is lower compared to RHB Bank. This can be improved by not relying too much on debt financing for its operations and to provide more return to investors. Also, Hong Leong Bank did not create much value to the shareholders due to low ROE. However, just the net margin part is the main strength of Hong Leong compared to RHB Bank This indicates that operating costs are well controlled by Hong Leong Bank compared to RHB Bank.This is a good i ndicator as this prevents wastage and smartly uses the assets to generate more income. The liquidity ratio for both the banks are below 1 which is not safe for both banks because they cannot meet the requirements to pay off the obligations and up-to-the-minute assets are less than current liabilities they having. Based on the ratio analysis for year 2009 to 2010, the ROE, ROA and net margin ratio shows a good improvement due to economic apprehend and inflation happens during the period. However, in 2009, most of the ratio for Hong Leong Bank declines because may be due to economic recession and the decline in the economic bodily function of the bank.For the credit risk, RHB Bank did not manage its credit risk well compared to Hong Leong based on the credit analysis. RHB could improve their credit risk by having an internal audit to check on the loan defaulters and the accounts. Personal experience of chitchating banks We visited Hong Leong Bank and RHB Bank in Ampang branch and Cheras branch. We asked the branch music director of RHB Bank for more details of their items on balance sheet and income statement. She did not know what items are called interest earning assets in Balance sheet. She does not know Income Statement and Balance Sheet. I was surprised, she is a manager and she does not know.She was mental enough to call the headquarter of RHB Bank and made me speak to the person in charge of financial statements. Well, I was told that each bank has different items art interest earning assets and liquid assets. He cannot release those details. The RHB Bank and Hong Leong Bank in Ampang get-go have 400 to 500 customers daily and they are overcrowded during eat hours. However, the RHB Bank has 100-150 customers daily and Hong Leong Bank has 50-100 customers daily in Cheras branch. Most customers come during the lunch hours. Ampang branch has more customers compared to RHB Bank. Thus it depends on location, the number of customers visit banks. Below are the cards of Hong Leong bank and RHB BankAmpang Branch Cheras Branch Part B Virtual Bank Balance Sheet Liabilities Asset 1. Deposit 1. Gold and exotic exchange i. Current deposit 2. Cash and Liquid Assets ii. Fixed deposit 3. Securities iii. Certificates of deposit i. Trading securities iv. Other deposits such as call deposits, cash ii. Investment securities management accounts and savings account iii. short term discount security 2. Non-deposit liabilities iv. Long term bonds or notes Liabilities due to clearing houses and financial 4.Loans and advances institutions and rank in priority after deposit i. Overdraft i. redemption agreements ii. Credit card outstanding ii. promissory notes iii. Housing finance iii. Liabilities on bill acceptances iv. Other term loans iv. Corporate bonds and other long-term borrowings v. Lease and hire purchase finance 3. Due to other banks 5. Due from other banks 4. Trading derivatives 6. Trading deri vatives 5. Other financial liabilities at fair value 7. Other financial assets at fair value 6. Other borrowings 8. All other asset 7. Bonds, notes, and subordinated debt 9.Due from customer on acceptance 8. Other debt issues 9. All other liabilities 10. Goodwill and other intangible asset Capital Capital acts as a buffer against unexpected losses and protects against insolvency. i. Debt capital borrowed funds ii. Equity capital shareholders fund NOTES Asset 1. Changes in this item reflect transactions of the following kinds a. the Banks transactions in exotic exchange and foreign securities (including under salvation agreements) b. earnings on foreign currency investments and c. hanges in the valuation of foreign currency and gold, and changes in the market prices of the Banks holdings of foreign currency securities. 2. Liquid assets are assets that can be converted into cash quickly without loss of value 3. i. Trading secur ities banks plans to sell originally maturity ii. Investment securities banks plan to hold till maturity iii. Short term discount securities pay suit value at maturity iv. Long term bonds or notes which pay coupons during the life of the security and the introduce value of maturity. 4. Includes loans, deposits with central banks and other regulatory authorities and settlement account balances due from other banks.Amounts due from other banks are initially recognize at fair value and subsequently measured at amortised cost. Advances non-derivative financial assets with fixed payments that are not quoted in an active market i. Overdraft borrower can draw up to the limit * Interest payable on amount drawn * Commitment fee is payable on the undrawn amount ii. Credit card outstanding borrower can purchase on credit or take cash in advance -form of revolving credit -Interest payable on amount drawn -annual fee may be supercharged iii.Housing finance Mortgage where the col lateral is real estate loan application fees are charged variable rates(up to 30 historic period) fixed rates(3-5 years) iv. Other term loans poser such as fully drawn advance maturity of 5-8 years a single loan of a specific dollar amount fixed interest rate application fees, establishment fees quittance maybe fully amortised or structured to match the profits Generated by project being finance. v.Lease and hire purchase finance secured loans where the collateral is an asset term of loan related to the life of the collateral fixed interest rate application fees, establishment fees 5. Trading derivatives have not been shown by contractual maturity because they are typically held for various periods of time. 6. Also called as market related contingencies such as futures, swaps, options, forward rate agreements 7. physical exercise land, buildings 8.Due from customer on acceptance customer who wants to borrow from the bank may be offered a bill facility and the customer must agree to repay the bank. The bank is the acceptor(promise to pay the holder the face value Liabilities Deposit 1. Current deposit No maturity and no minimum balance Withdrawals by writing a cheque or through electronic transactions May be interest bearings(variable interest rate) or non-interest bearing 2. Fixed deposit Minimum amount Specific term eg. 1-5 years Early withdrawals incur a penalty Fixed interest rate 3. Certificates of deposit Face value at least $100,000 Maturities between 14-270 days Fixed interest rate Originally issued at par but may trade above or below depending on marketplace yields. At maturity, receives face value plus interest 4. The deposits a) Call deposit must give notice of withdrawal, variable interest rate b) cash management accounts minimum balance requirement, variable interest rate tie in to money market yields c) savings account no minimum balance or notice of withdrawal requirements variable interest rate Non-De posit i. Repurchase agreements banks borrow for a short period (5 years) sell securities with an agreement to repurchase on agreed date at agreed price ii. Promissory notes discount securities bank sells to the market iii. Liabilities on bill acceptance -bank is the acceptor and pays face value at maturity iv.Corporate bonds and other long term borrowings example domestic bonds, eurobonds Due to Other Banks Includes deposits, vostro balances, repurchase agreement and settlement account balances due to other banks. Trading derivatives Financial liabilities at fair value are financial liabilities held for trading if it is acquired or incurred principally for the purpose of sell or repurchasing it in the near term. Other financial liabilities at fair value Borrowings are initially recognised at fair value, net of transaction costs incurred. It is subsequently carried at amortised cost, any difference between initial recognised amount and the redemption value is recognised in the profit or loss.For example borrowing from reverse bank, other banks, or borrowing from outside of the country. Other financial liabilities at fair value Short term and long-term debt issues of the group including commercial paper, notes, term loans, medium-term notes, mortgage backed securities and other discrete debt issues. All other liabilities I) Bills Payable (drafts, telegraphic transfers, mail transfers payable, pay slip, bankers cheques, other miscellaneous items, and so on II) Inter-Office (The inter-office adjustments balance, if in credit, should be shown under this head. Only net position of interoffice accounts, inland as well as foreign should be shown here)III) Interest Accrued (Includes interest due and payable and interest accrued, but not due on deposits and borrowings Includes net render for income tax and other taxes like interest tax (less advance payment, tax deducted at source, etc. ) IV) Deferred Tax (surplus provisions in bad debts provision account, surplus provisions or depreciation in securities, Contingency funds which are not disclose as reserves but are actually in the nature of reserves, proposed dividend/transfer to Government. ) V) Others (which are not disclosed under any of the major heads such as unclaimed dividend, provisions and funds kept for specific purposes, unexpired discount, outstanding charges like rent, conveyance, etc. certain types of deposits like staff security deposits, margin deposits, etc) Goodwill and other intangible assetGoodwill arises on the acquisition of an entity and represents the excess of the aggregate of the fair value of the purchase consideration and the amount of any non-controlling interest in the entity over the fair value of the Groups share of the identifiable net assets at the date of the acquisition. Capital Debt capital borrowed funds, ranks higher than equity capital for the repayment of annual returns. Equity capital -shareholders fund which represents the remaining inter est in assets of a company. -permanent commitment of funds -earns the correspondence income of the firm after all interest and other costs -main components includes issue share, reserve and retained earnings References Hong Leong Bank. (2011). Annual Report 2010. Retrieved family line 14, 2011 from http//www. hlb. com. my/data/ar2010. pdf RHB Bank. 2011). Annual Report 2010. Retrieved September 12, 2011 from http//www. rhb. com. my/corporate_profile/investor_relation/pdf/annual_reports/2010/RHB%20Bank%20Berhad%202010. pdf Gup, B. E. , Avram, K. , Beal, D. , Lambert, R. , amp Kolari, J. W. (2007). Commercial Banking. Milton, Qld John Willey amp Sons Hassan, H. , amp Mohammed, F. (2007). Banks risk management a comparison study of UAE national and foreign banks. The daybook of Risk amp Finance, 8(4), 394-409. Hong Leong Bank Berhard. (2009). Annual Report 2009. Retrieved September 14, 2011 from http//www. hlb. com. my/data/ar20091. pdf Milbourn, G. , amp Haight, T. (2005).Providin g Students with an Overview of Financial Statements Using the Dupont Analysis Approach. The Journal of American Academy of Business, Cambridge. 9(3), 46-50 Narayanan, L. (2010). How DuPont Analysis Reveals Return on Equity Ratio. Managing Credit, Receivables amp Collections. 2(1), 12-14. Pinsent, W. (2010). Decoding DuPont Analysis. Retrieved September 2, 2011, from http//www. investopedia. com/articles/fundamental-analysis/08/dupont-analysis. asp Class Dupont. (2010). Current Financial Accounting. Retrieved September 10, 2011, from http//www. sjrbiz. info/Current%20Classes/Financial%20Accounting%20Class/Dupont%20Model%20in%20a%20Nutshell. pdf