The bank is confident of meeting the targets despite worries of an economic slowdown.
HAVING been through two major bank mergers, Yvonne Chia, managing director and CEO of Hong Leong Bank (HLB), is confident of leading her team on a journey of transformation under the current merger with EON Bank.
Despite concerns over a potential economic slowdown, she remains confident of meeting the value indicators of the merger.
"We had entered the merger fully aware of what was ahead and the potential risks and opportunities. We will still aim, on a combined-bank basis, to grow,'' she tells StarBizWeek. "We are on a growth agenda.''
The HLB group's net profit after tax (incorporating two months' contribution from EON Bank) for financial year (FY) 2010/11 is RM1.135bil while that of stand-alone HLB, excluding consolidation of EON Bank group results and merger-related financials for FY10/11, is RM1.168bil, representing a gain of 16% year-on-year.
"However, if the market does turn, then we have to be adaptive. At the end of the day, we cannot be blindly growing when the market has changed and we must protect our business sustainability.
"I must always be guided by sustainable growth and the long-term franchise value,'' she says. "I just have to be (confident). I just have to do it. I think today, even in a cautious environment, there are always things we can do if we know the clients and segments to pick,'' she says, adding that there are still opportunities in the economy where drastic changes are not likely to happen overnight.
Analysts have varying views on the HLB group, from "buy" to "hold".
HwangDBS Vickers Research, in upgrading its target price on HLB, cites improved efficiencies, higher net interest margin and a larger presence in the hire purchase (HP) as well as small and medium enterprises (SMEs).
Strong organic growth, coupled with contribution from its 20% associate Bank of Chengdu, which remains in growth mode in consumer, SME and local corporates, are also factors favouring the merged HLB group, says HwangDBS in its report.
UOB Kay Hian Research has lowered its profit forecast for FY12 and FY13 by 9%, factoring in a lower loan growth (from 16% and 12.5% to 15% and 11% respectively).
"Management is guiding for a loan growth of 10%-15%, driven by financing extended to the consumer sector and SMEs (both of which make up 77% of HLB's portfolio). We are looking at a loan growth of 12% but foresee downside risks arising from weaker economic growth,'' says UOBKayHian in its report.
A key feature of this merger will be Hong Leong's standards of efficiency and productivity, details of which will be revealed over time.
Cost synergies will be derived from sharing of information technology, collapsing of two facilities, people efficiency as well as processes and systems.
Revenue synergies are derived from an expanded customer base and cross-selling of more products and services especially in the consumer and business banking as well as global market divisions.
Revenue synergies are also derived from a lower cost of funds.
"We also have to deepen the return on assets from each client relationship and come up with bundling of products and services to be more sticky' with the clients,'' she says.
Altogether, revenue and cost synergies are estimated by analysts to come up to RM400mil in three years; however, the breakdown is not available yet.
Some analysts opine that it may not be that easy to achieve those synergies in view of the economic slowdown. Others note that there are "rough indications'' of those synergies but question how fast they can be realised.
There is also an estimated cost synergy of 40% in cost savings which some analysts find rather ambitious. However, Chia is not commenting on that at the moment. All she would say is that it is only an estimate and that she hopes to achieve some of those synergies within the first year itself.
"We have to focus on the salient points,'' she explains. The combined workforce is 12,000; the desired numbers would have to be evaluated based on those efficiency standards.
Cost synergies will be front-loaded while revenue synergies will develop over time, she says in HLB's 100-day achievement report. Integration teams are finalising plans to realise these synergies and reports on the achievements will be out every six months.
Some concrete numbers will be useful as analysts ponder over how much more value can be extracted in this challenging environment.
Major cost items for the integration include harmonisation of information technology applications, infrastructure and security systems, relocation and redeployment of branches, overall efficiency improvements and costs to refresh the brand identity.
No more merger expenses
With an emphasis on value-added spending, Chia does not expect more merger expenses which amount to RM111mil so far.
"There are some expenses that have to be capitalised and some that have to be expensed. We will continue to grow our performance,'' she says.
There will be no kitchen sinking per se, but provisioning will be brought to HLB's standards. "My loan loss coverage ratio (indicating the bank's coverage for bad debts) is about 130%,'' says Chia. "After the merger, it was 110%. We may bring it back up to between 120% and 125%.''
"Our first phase of providing common services to the branches of both banks was done well and we are now in the second phase. The immediate item in this second phase is to reap the synergies and value creation, post merger,'' she says.
The first wave involves delivering common customer services while stabilising the business and ensuring the inter-operability of customer-facing functions for most transactions.
Under the second wave, Chia's priorities will include, besides the reaping of synergies, alignment of people, further scale and achievement of standards as well as plans for reconfiguration of branches.
While the enlarged HLB group will be the fourth largest in terms of assets, it has the second largest branch network of 329. The group has no plan to trim the number of branches.
Analysts question the viability of such a plan amid concerns over cost savings.
"The board of HLB believes that the real banking on the ground involves reaching out to the community. To do this, a wide branch network is required. Internally, before this merger, we have been wanting to grow the number of branches to more then 300,'' Chia says.
To make that work, there are factors that go beyond physical presence.
"My challenge, going forward, is how to optimise the use of branch network to drive our value proposition and embed ourselves to the community.
"That requires the presence of entrepreneurial people and savvy branch managers. A culture of being service and community-oriented will help make the difference,'' she says.
Branch set-ups will no longer be based on the traditional concept but integrated with e-banking for greater efficiency.
HLB has rolled out 46 business banking branches that offer customer facing and relationship banking for the SME and business owners.
Customer and staff retention
The merger with EON Bank, which has a strong HP franchise, has caused some concerns over retention of customers and dealers.
This is in view of the fact that HLB had backed away from the HP business at one time, possibly estranging the group from an important link the auto dealers.
Chia recognises the contribution of the HP sector. "The merger with EON Bank is about growth and HP is a sizeable segment in the (EON Bank) group.
"The key thing is not just to grow and sustain the business but also enhance it through portfolio balancing and efficiency of processes.
On the relationship aspect, Chia assures that it is on track. "At many get-togethers recently, we had good engagement and proactive dialogue with the auto dealers as well as at the ground level,'' she says.
In terms of staff retention, Chia's strategy includes focusing on young talent and upgrading of current competencies.
Many competency areas such as in branch management, service and sales as well as credit skills will be in demand.
To underscore the seriousness of the move to enhance human capital, the HLB group has recently set up training academies for branches, operations, sales and credit.
Skill enhancement in product selling, risk management as well as new accounting rules are among some of the required competencies that need to be developed.
On a personal level, she refutes the notion that the HLB work culture is tough and demanding.
"I don't like to procrastinate,'' she says. "I know I can be demanding but those who are ambitious, driven, competitive, willing to learn and work hard will work very well with us.
"To excel, one has to be demanding and to insist on high standards ... that is universal. We attract people who want to do well in life and grow to be successful indivduals,'' she adds.
More mergers and acquisitions?
"We have enough on our plate to work on for the time being,'' says Chia.
However, she is not restricting herself to just that. "We remain opportunistic. If a deal comes, I will look at it,'' she says. "If it makes sense, we will look at it seriously.''
Taking EON Bank as an example, Chia recalls talking to EON Bank at a totally different price when she first joined HLB seven years ago.
"They held out then,'' she recalls. "Since then, regulations and rules have changed.''
HLB paid RM7.30 per share or RM5.06bil for all the assets and liabilities of EON Bank. It had increased its original offer of RM7.20 per share upon protests by certain shareholders.
Reports indicated there had been offers previously but the EON Bank shareholders had held out for better prices.
"Sometimes, it is good to sit down and wait. We never know, when a crisis happens, we have sensible prices to negotiate on.
"A lot of people are expanding and expanding,'' she says. "At the end of the day, it is all about specific cases of how the potential value of acquisitions can be achieved,'' she says.
Among its overseas acquisitions, the bank in Vietnam has turned in its maiden profit while its 20% associate Bank of Chengdu has brought a decent profit contribution of RM211mil in the last financial year.
Chia is full of verve and vitality, and is ever ready take HLB into the next quantum leap. Known to be a tennis buff, she is passionate on how to put HLB on a stronger footing to face the changing financial landscape.
Through detailed and intense planning, she has set up the machinery that not only closely tracks but also implements the merger strategies.
In this respect, she is not short of experience and is aware of all the steps necessary for a successful merger.
It is not just the technical requirements that merit close attention but also the human and communicative aspects. That involves a lot of energy and interest to sit down and engage with the staff, of all ranks, individually as well as at the branch level nationwide.
"I think all CEO roles involve dealing with people. Everything that we do is about dealing with the human psyche,'' she says. "I will try, whenever I can, to reach out to each individual personally and have a heart-to-heart conversation.
"I always believe in confronting (an issue) honestly. My management style is very much based on facts and guided by what is best for the organisation,'' she says.
Despite the seriousness of her role and work pressure, Chia has a sense of humour and likes to tell anecdotes. Being customer focused and market-oriented, she uses these real life anecdotes as a means of relating the customer experience.
She also likes to share a light moment with her staff or people around her as a rallying point. For at the end of the day, she sees their coming together as one team as a vital building block in her foundation for merger value creation.
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