Abstract The purpose of this assignment is to evaluate the performance of Alliance Bank Malaysia Berhad for the financial

year ended in2009. Firstly, we discuss the dupont model. Dupont model breaks down ratio into five distinct parts, which is Return of Equity (ROE), Return of Asset (ROA), Leverage Multiplier, Assets Utilisation and Profit Margin. Then we calculate the trend of Alliance banks using ROE, ROA, Leverage Multiplier, Asset Utilisation and Net Margin. These five ratios are used to calculate the trend of Alliance Bank from 2008 to 2009. It shows that the trend increase drastically in 2008 and fall again in 2009. Although in year 2008, the world is affected by global financial crisis, but Malaysia is not affected severely, plus Alliance Group has re-engineered their business system to improve the quality and effectiveness of the services. Next, we also calculate other ratio such as credit risk, capital risk, efficiency ratio and Off-Balance Sheet indicator to further evaluate the further analysis of the report of Alliance Bank. Next, we also compare Alliance Bank with its peer, which is Hong Leong Bank. We use the same ratio, which is ROE, ROA, Leverage Multiplier, Asset Utilisation and Net Margin. It shows that the performance of Hong Leong Bank is better that Alliance Bank. We also compare the compare the credit risk management of Alliance and Hong Leong bank. Both banks use different policy and have different objective. Besides that, we also compare the loan and non performance loan. After the comparison, it shows that Hong Leong bank give out more loans than Alliance Bank. As for non performing loan, Hong Leong Bank is lower which indicates that Hong Leong has lesser default loans as compare to Alliance Bank.

Question 1 (a) Dupont Model is also known as Return of Equity (ROE) model. It uses the return to shareholders as the starting point which is based on ratios. Dupont Model breaks down ROE performance into its component parts. This analysis enables the analyst to understand the source of superior return by comparison with companies in similar industries (Melvin, Boehlje, Dobbins and Gray, 2004). An increase in any ratio contributes to an increase in ROE. Besides that, it is important to investigate risk ( Gup, Avram, Lambert and Kolari, 2007).
Leverage Multiplier Total Asset Equity Asset Utilisatio n Revenues Total

ROE Net Income Equity

= x
ROA Net Income Total Asset

x =
Not (Profit Margin) Net Income Revenue

Return on equity (ROE) reveals how much profit a company earned in comparison to the total amount of shareholder equity found on the balance sheet (Diane LI and Yung, 1006). It is used to measure the return of shareholder wealth. It is a good starting point in the analysis of a banks financial condition. This is because if the ROE is relative low for the bank as compare with other bank, ROE will decrease the banks access to new capital. Those new capital that receive may use to expand and maintain a competitive position in the market. Moreover, a low ROE may limit the growth of the bank. This is because the regulations require assets to be at a certain number of times equity capital. It can be also broken down into different parts to help identify trends performance of the bank (Gup et, al, 2007). Return on assets (ROA) measures the ability of management to use the real and financial resources of the bank to generate returns. The relationship of ROA and ROE is

ROE= ROA x Equity multiplier Profit Total Equity = Profit Total Assets x Total assets Total equity

This formula shows the return on equity ratio as the product of ROA and a ratio indicating the extent to which the bank is using leverage multiplier (Gup et, al, 2007). Another formula to calculate profits is: ROE= Profit margin x Asset use x Equity multiplier Profit Total Equity = Profit x Operating revenue Total assets x Total assets Total equity Operating revenue

where operating revenue is the sum of total interest income and non-interest income. Profit margin ratio provides information about the ability of management to control expenses, including taxes, given a particular level of operating income. The asset use ratio represents the ability of management to use assets effectively to generate revenues. Therefore, both ratios enable the bank analyst to gain insight into the derivation of ROA (Gup et, al, 2007).

Question 1(b)(i)

Trend comparison for Alliance Bank Malaysia Berhad for the year 2007, 2008 and 2009: Ratio ROE Leverage multiplier ROA Asset utilisation Net margin Formula 2007 5.59% 12.2x 0.46% 4.93% 16.87% 2008 15.36% 10.42x 1.47% 5.17% 28.54% 2009 8.93% 10.73x 0.83% 4.91% 9.34%

Question 1 (b)(ii) Peer comparison for 2009: Ratio ROE Leverage multiplier ROA Asset utilisation Net margin Formula Alliance bank 8.93% 10.73x 0.83% 4.23% 19.68% Hong Leong bank 12.4% 13.3x 0.93% 4.88% 19.13%

Question 1 (c) In year 2007, ROE is 5.59%. The return to shareholders is relatively low because Alliance group decides to expand its reach by repositioning its branches into sales and service outlets. When in the year 2008, there is a drastic increase of ROE, which is 15.36%. In optimism in the financial markets in the first half if 2007 begin to taper off in the second half sue to the financial crisis happen in United States. The financial crisis occur is due to the pressures in the United States subprime mortgage crisis and further increases in crude oil prices. But Malaysia is not heavily affected by the downturn. The impact of the financial crisis on Malaysia is relatively less severe due to the limited exposure of local banks to the foreign debt markets. Another reason of increase in ROE is due to the positive progression from the restructuring phase to focus on building a competitive positioning. New business strategies and models and re-engineered business processes and system were used to increase the higher productivity and efficiency. Moreover, Alliance Group has launched Islamic Banking subsidiary on 1 April 2008 (The Star Online, 2008). This put Alliance Group in a better position to develop their own branding under the Islamic financing products. And in year 2009, there is a decrease in ROE to 8.93%. In year 2009, exports have been impacted and the demand for loan decrease. This is because during global financial crisis, investors hardly required for loan.

Leverage multiplier has fallen from 2007 to 2008, which is 12.2x to 10.32x. This is due to the slightly lower capital risk in year 2008. And it increases in the year 10.73x. As for Return on Assets (ROA), it increase in 2008 and decrease is 2009. Asset Utilisation increase in year 2008 from 4.93% to 5.17%.The non- interest income increase from $153,586 to $197,043 from year 2007 to year 2008. In year 2009, it falls to 4.91%. Whereas the net margin increase from 16.87% to 28.54% from year 2007 to 2008. This is because there is an increase in operating revenue from year 2007 to 2008. Since the revenue increase, tax also increased. Net margin in the year 2009 decrease to 9.34%. There is a decrease because there is not much increase of operating revenue from year 2008 to year 2009. Since there is not must increase in revenue, thus, there is a slight decrease in tax revenue. For ROE, Hong Leong Bank has higher ROE as compare to Alliance Bank. Hong Leong has higher ROE is because Hong Leong has more diversified services as compare to Alliance in year 2009. Hong Leong Leverage Multiplier is higher than Alliance Bank, which is higher by 22.57 times. This shows that Hong Leong Bank has more debt as compare to Alliance Bank. As for ROA, Hong Leong Bank has higher ROA than Alliance Bank. Higher ROA implies that Hong Leong Bank has higher assets. AS for asset utilisation, Hong Leong has higher asset utilisation. Means Hong Leong Bank can generate more sales in S1 given. As for net margin, Alliance Bank has higher net margin. Higher net margin indicates that Alliance Bank has higher net income of 19.68 of sales.

Question 2 Bank Efficiency

Other Key Ratios Alliance Bank 2009 Hong Leong Bank 2009

Cost to Assets Ratio

= 0.0345

= 0.0337

Cost to Income Ratio/ Efficiency Ratio

= 0.6987

= 0.6919

There are three ratios in Bank Efficiency which is operating income per employee, cost to assets ratio and efficiency ratio. The cost to assets ratio measures costs in relation to the size of a deposit taker. It is not affected by interest rate changes so it can give a better picture of gains or deterioration in efficiency at times when rates or spreads have changed significantly (McCune, 2005). The lower cost to assets ratio is better. Therefore, Hong Leong Bank shows a better cost to assets ratio. The efficiency ratio is a useful tool in determining how effectively a bank or thrift is generating revenue, and as one would expect there are many different ways to calculate the number (Normandin and Boileau, 2005). The lower the efficiency ratio the better the banks efficiency. Therefore, Hong Leong Bank show a better efficiency ratio as it is lower as compare to Alliance Bank.

Interest Differential

Other Key Ratios

Alliance Bank 2009

Hong Leong Bank 2009

Net Interest Income

1,204,584,000 553,266,000

2,937,002,000 1,579,883,000

Interest Earned Interest Expense = RM 651,318,000 = RM 1,357,119,000

Percentage Interest Margin (Net Interest Margin)

= 2.32%

= 1.93%

Interest differentials measure the gap in interest rates between two similar interestbearing assets (McCune, 2005). There are two key ratios in interest differentials which is the net interest income and the percentage interest margin. Net interest income is the difference between revenues generated by interest-bearing assets and the cost of servicing (interestburdened) liabilities. Hong Leong Banks net interest income is better than Alliance Bank. The interest income earned can cover the interest expense extensively. Percentage Interest Margin for Alliance Bank is higher than Hong Leong Bank. Thus, this shows that Hong Leong is in a better position as compare to Alliance Bank. Risk Measurement
Other Key Ratios Alliance Bank 2009 Hong Leong Bank 2009

Ratios Reflecting Losses

= 0.003840 Simple Capital Ratio

= 0.002491

= 0.0932

= 0.0752

Risk measurement is the evaluation of the magnitude of risk which usually involves developing a set of risk factors that are observed and measured to detect the presence of risk (McCune, 2005). Risk measurements consist of interest sensitivity ratio, credit risk, liquidity risk and capital risk. Credit risk is the risk of loss of principal or loss of a financial reward stemming from a borrower's failure to repay a loan or otherwise meet a contractual obligation. The credit risk for Hong Leong Bank is lower than Alliance Bank. Thus, Alliance Bank is having more risk as compare to Hong Leong. Capital risk is the risk an investor faces that he or she may lose all or part of the principal amount invested (Investopedia, n.d). The lower the capital risk, the better. Hong Leong Bank has a lower capital risk as compare to Alliance Bank. This shows that Hong Leong Bank has more funds as compare to Alliance Bank.

Other Key Ratios

Alliance Bank 2009

Hong Leong Bank 2009

Off -Balance Sheet Indicator Off-Balance Sheet credit risk exposure Total risk-weighted assets

3291868000 16864127000

2595156000 26851357

= 19.51%

= 9.664%

The Off-Balance Sheet indicator for Alliance Bank is higher than Hong Leong bank. This is due Alliance Bank did more Off Balance Sheet activities such as commitments and derivatives.

Question 3

Overdrafts Term loans/financing -Housing and shop loans/financing - Syndicated term loans/financing - Hire purchase receivables - Lease receivables - Other term loans/financing Credit/charge card receivables Bills receivable Trust receipts Claims on customers under acceptance credits Block discounting Revolving credit Staff loans/financing Other loans/financing

Alliance Bank RM (000) 1,551,626

Hong Leong bank (000) 2,086,550

7,086,945 309,204 725,190 104 3,937,992 645,058 68,918 125,914 1,522,235 853,369 177,295

16,933,816 1,458,633 3,284,687 1,653,690 2,017,519 211,019 92,982 3,184,696 8,218 1,219,780 96,668 44,390 32,292,648 (613,549) 31,679,099 28,385

Unearned interest and income Gross loans, advances and financing Fair value changes arising from fair value hedges

17,053,127 (85,226) 16,967,901 -

Unamortised fair value changes arising from terminated fair value hedges Allowance for bad and doubtful debts and financing: - specific - general

8,714

(394,418) (295,572)

(306,807) (471,305)

16,277,911 Total net loans, advances and financing

30,938,086

Hong Leong Bank gives out more loan as compare to Alliance Bank, which is more by $14,660,175. The biggest portion of loan comes from term loan. Follow by overdraft. Besides that, Hong Leong Bank has smaller allowance for bad debt as compare to Alliance Bank.

Within one year One year to three years Three years to five years Over five years Gross loans, advances and financing

Alliance Bank RM (000) 5,165,936 526,027 954,944 10,320,994 16,967,901

Hong Leong bank (000) 9,640,868 1,883,361 2,174,430 17,980,440 31,679,099

The gross loan for Hong Leong Bank is higher than Alliance Bank. It is higher by $14,711,198.

Net non-performing loans, advances and financing Ratio of non-performing loans to total loans, advances and financing net of specific allowance

Alliance Bank RM (000) 305,121 1.8%

Hong Leong bank (000) 447,092 1.4%

As for non performing loans, for Alliance Bank is higher than Hong Leong Bank. This shows that Alliance has many default loan as compare to Hong Leong Bank. This will hinder the growth and effect the efficiency of the bank if non performing loan increases. The policies adopted by the Alliance Group are guided by the Groups Credit Policies and Guidelines, in line with Best Practices in the Management of Credit Rick, issued by Bank Negara Malaysia. Whereas for Hong Leong Bank uses the process which is documented in the Credit Manual. The Credit Manual sets out the Banks policies on lending guidelines, lending authorities, credit risk rating, credit reviews, collateral, credit administration and

security documentation, and timely rehabilitation and restructuring of problematic and delinquent accounts. The objective of credit risk management for Hong Leong bank is to ensure that structures and processes are in place to maintain and continuously enhance the Banks risk assessment capabilities in key areas of credit.

Question 4 For the financial year ended 31 March 2009, the Group made a profit before tax of RM303.3 million representing a decline of 39.6% compared to the previous financial year. This was mainly due to prudently making higher allowances for losses on loans, advances and financing in anticipation of the rapidly deteriorating economic environment. Profit attributable to shareholders for the financial year under review was RM229.1 million, which represents a return on average shareholders funds of 8.6%. Earnings per share were 14.9 sen as compared with 25.4 sen in the previous financial year. The decline in performance was registered despite a net income growth of RM40.6 million or 4% higher as compared with 25.4 sen in the previous financial year. Shareholders funds increased from RM2.59 billion to RM2.76 billion as at 31 March 2009. Total assets at year end stood at RM31.85 billion, up from RM27.67 billion in the previous financial year while net assets per share rose from RM1.67 to RM1.78. During the financial year under review, Alliance Group declared two interim dividend payment totalling 6.25 sen per share, tax exempt under the single tier tax system. The first interim dividend of 2.50 sen was paid on 27 August 2008 whilst the second interim dividend of 3.75 sen was paid on 3 March 2009.

(2180 words)

References Alliance Bank Malaysia Berhad. (2009). Directors Report and Audited Financial Statements 31 March 2009. Retrieved 30 August, 2010 from
http://www.alliancebank.com.my/annualreports_2009.html

Gup, B. E., Avram, K., Beal, D., Lambert R., & Kolari, J. W. (2007). Commercial banking. Milton, Qld: John Wiley and Sons. Hong Leong Bank Berhad (2009), Annual Report 2009. Retrieved 30 Auguest, 2010 from
http://www.hlb.com.my/ahlb/inv_bursa_ann.jsp?flag=inv_bursa_ann

McCune,J. (2005). Efficiency ratios--what do they tell you? Retrieved September 1, 2010 from http://www.allbusiness.com/finance-insurance/credit-intermediation-relatedactivities/431012-1.html

Normandin,M. & Boileau, M. (2005). Dynamics of the Current Account and Interest Differentials. Retrieved September 6, 2010 from http://ideas.repec.org/p/iea/carech/0305.html

The Star Online (2008). Alliance Bank upbeat on Islamic banking assets growth. Retrieved September 4, 2010 from http://biz.thestar.com.my/news/story.asp? file=/2008/5/16/business/21271518&sec=business