Christian Debt Recovery

Debt Asset Ratio Definition

September 6th, 2008 |

Author: Gavin

Hong Leong Bank in malaysia

With more than 100 years of banking knowledge and experience, Hong Leong Bank has a strong market position and well-recognized business franchise. Hong Leong Bank, one of the leading local banks in Malaysia has won many recognitions and accolades over the years: the Finance Asia 2002 Asia’s Best Companies Award, the KPMG 2003 Shareholder Value Award, the CGC Top SMI Supporter Award 2004, The Asian Banker’s Best Credit Card Product Award 2006, the 2006 JPMorgan Chase MT202 Elite Quality Recognition Award, and The Asian Banker’s Best E-Banking Project 2007. Independent valuations have also placed Hong Leong Bank among the top 10 largest brands in the country.

Hong Leong Bank Berhad started its humble beginnings in 1905 in Kuching, Sarawak, Malaysia under the name of Kwong Lee Mortgage and Remittance Company and later in 1934, incorporated as Kwong Lee Bank Limited. In 1989, it was renamed MUI Bank, operating in 35 branches. In January 1994, the Group acquired MUI Bank through Hong Leong Credit Berhad (now known as Hong Leong Financial Group Berhad). This milestone saw the birth of Hong Leong Bank and in the same year in October, Hong Leong Bank was listed on the Kuala Lumpur Stock Exchange.

In 2004, the finance company business of Hong Leong Finance Berhad was acquired by Hong Leong Bank. Today, the enlarged, merged entity has over 185 branches in Malaysia, Singapore and Hong Kong, 17 Business Centres in Malaysia, and a range of alternate and electronic channels including self-service terminals, telemarketing, and call centre, Hong Leong Online, Hong Leong Phone Banking and Hong Leong Mobile Banking.

In 2007, Hong Leong Bank acquired a 20% stake in Chengdu City Commercial Bank Co., Ltd China, the first strategic investment of any Malaysian bank into the Chinese banking sector.

Cost of capital includes the cost of debt and the cost of equity. The cost of capital determines how a company can raise money (through a stock issue, borrowing, or a mix of the two). This is the rate of return that a firm would receive if it invested in a different vehicle with similar risk. The WACC is the best rate to be used in appraising the project. The weighted average cost of capital reflects the company’s long-term future capital structure and capital costs. WACC increased with decreasing leverage. Investors use WACC as a tool to decide whether to invest. The WACC represents the minimum rate of return at which a company produces value for its investors. We calculated cost of capital for each company in one excel file that we attached to the soft copy and in this part we represent only the results of cost of capital.

Capital structure

The capital structure of a firm describes the way in which a firm raised capital needed to establish and expand its business activities. , which shows the proportion of capital from different resources. In other word capital structure is like a raw material which firm converts into the asset in order to earn profit by satisfying customer’s need. The capital structure decision focus on how the firm uses debt and equity in conduction business. There are different approaches regarding capital structure that explain how capital structure affects on the value’s firm.

Static Trade-off Theory: In a static trade-off framework, the firm is viewed as setting a target debt-equity ratio and gradually moving towards it. Debt financing has one important advantage over equity: the interests that firm pays are tax-deductible while equity income is subject to corporate tax. But debt also increases financial risk that makes debt-financing choice not cheaper than equity. So, in a static trade-off consideration, managers regard the firm’s debt-equity decision as a trade-off between interest tax shields of debt and the costs of financial distress. In particular, capital structure moves towards targets that reflect tax rates, assets type, business risk, profitability, and bankruptcy costs. In fact, the firm is matching the costs and benefits of borrowings, holding its assets and investment plans constant.

Net working capital management

Working capital, also known as net working capital or NWC, is a financial metric which represents operating liquidity available to a business. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. It is calculated as current assets minus current liabilities. If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit. A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable and cash. Current assets and current liabilities include three accounts which are of special importance. These accounts represent the areas of the business where managers have the most direct impact:

accounts receivable (current asset)
inventory (current assets), and
accounts payable (current liability)

Because our case is a special case (bank) this part is about different from others. Bank doesn’t have working capital.

An ordinary company’s internal business cycle can be thought of as the following:

1. Beginning with customer’s cash or credit, make some product [inventory] or prepare to provide some service

2. Find customers to buy number

3. Ship the product or deliver the service [record revenue], usually with an agreement to be paid later [terms of sale]

4. Collect the accounts due, resulting in cash
a bank’s business is borrowing and lending money [plus a few odd other related things].

Thus, they don’t have much of step 1. They do have step 2. Step 3 is called lending. And step 4 would be receiving the loans back plus interest.
However, banks use much more leverage than ordinary businesses, in part because their fixed assets are small relative to the volume of their ‘sales’. [You need a desk to lend money, not a factory.]So, a bank’s financial statements, if you tried to organize them the way an ordinary company’s statements are organized, would be all out of proportion. Little plant and equipment. No inventory. Huge can accounts receivable but much of it not for years [auto loans, etc.].Now, the accepted definition of working capital is all assets likely to ‘turn’ within one year less all liabilities due within one year.

How can you apply this to banking? Some of the amounts due on a single loan are coming in this year and some aren’t. You’d have to divide the accounts of individual borrowers into short term and long term.

Similarly, some deposits will be drawing out within one year and some won’t. And we don’t know which! Since that was very difficult or impossible even 30 years ago, banks present statements differently. [You can make good estimates these days using computerized methods ... and they are estimates, not an actual counting.] So, we conclude that the concept ‘net working capital’ for a bank does not apply and should not be computed. Banks have other, more sophisticated reports, which tell their audiences about such aspects of their business as type of borrower, estimated net balance of assets and liabilities subject to interest rate changes within different time periods, etc. These are fairly new and well worth understanding.

About the Author

ems_salehi64@yahoo.com & Hamidreza sakkaki

0060178729454

student of malaysia(MBA)