FINANCIAL HIGHLIGHTS
In 2011, Bursa Malaysia Berhad produced commendable results, as evident in a number of key financial indicators. We recorded a 15% improvement in our operating revenue, from RM331.3 million in 2010 to RM381.3 million in 2011. This was a result of strong Securities and Derivatives trading performance brought about by greater foreign and domestic institutional and retail participation in both our markets. Securities trading revenue grew by 15% over the previous year to RM193 million while Derivatives trading revenue registered a significant 36% increase to RM51.2 million.
Adding to the positive impact on our operating revenues were a 13% increase in our information services revenue, totalling RM19.2 million; a 19% growth in access fees due to a restructuring of our various broker charges to RM8.7 million; and a 6% growth in listing fees to RM38.2 million. All other stable revenue comprising depository services, broker services and participant fees came up to RM46.7 million. Stable revenue, in total, grew 5% in 2011 over the previous year. Meanwhile, other operating revenue grew by 36%, from RM17.9 million in 2010 to RM24.3 million in 2011.
While operating revenue rose 15%, our operating expenses were contained at a modest 8% increase to RM214 million in the year under review. Higher staff costs and the service fees paid to the CME Group for the trading of our products on the Globex® trading platform contributed the most towards increased expenses. Should the said service fee be excluded, operating expenses only appreciated by 4% over 2010. This was the result of our efforts at better cost management during the year under review, as reflected also in our cost to income ratio which improved to 51% from 55% in 2010.
We achieved a PATAMI of RM146.2 million in 2011, a healthy 29% increase from the RM113 million recorded previously, which is the highest ever normalised profit over the last four years. As a result, our year-on-year ROE also showed a corresponding 28% increase, from 13% to 17%. We closed the year with our EPS appreciating from 21.3 sen in 2010 to 27.5 sen in 2011.
In recognition of the role of technology as an enabler, we expended RM13.6 million on capital expenditure in 2011, of which 86% was allocated to information technology systems including the crucial development of a new clearing system for the Derivatives market to be implemented in 2012.
Given our positive financial results, we were in a good position to support a high dividend payout of 95% in the year under review, surpassing our payout policy of 75%. A fuller picture of our financial performance is presented on pages 36 to 40 of this Annual Report.
MARKET OVERVIEW
The year under review was a rather eventful one for markets everywhere. The Malaysian market was shaped by external uncertainties which included the Eurozone debt issue, the US budgetary deficit, political developments in the MENA region, the Japanese earthquake and the generally weak outlook for the global economy which was more pronounced towards year end. Yet, despite these challenges and their impact on markets across the globe, Asia as a region emerged fairly resilient, while our own market showed tenacity. Strength was derived from our economic fundamentals, namely an accommodative monetary policy, resurgence of private investments via the government’s Economic Transformation Programme (ETP), major infrastructural spending by the\ government, strong commodity prices as well as robust domestic consumption.
Securities, our core business segment, benefited from high trading interest, with improved trading levels in terms of both value and volume. I am pleased to note that our Average Daily Trading Value for Securities reached RM1.79 billion, up 14% over 2010, while Average Daily Volume Traded recorded a significant improvement to 1.34 billion from the 1.02 billion noted previously.
Market capitalisation at end-December 2011 stood at RM1.29 trillion, up 1%. During the year the benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) gained 11.82 points and closed the year at 1,530.73 points. The Key Index hit a new record closing high of 1,594.74 points on 8 July 2011. Market velocity was constant at 33%.
On the Derivatives front, where we offer a range of 10 Derivative products, we saw traders hedging against the volatility in the global markets, helping our revenues surge by 36%.We also leveraged on the momentum gained from our CME partnership sealed in 2009, while unlocking the benefits of global accessibility and visibility post-migration to the Globex® trading platform. We attracted new participation from High Frequency Traders, providing clear validation for the path of globalisation that we have chosen. As a result, both total trading volumes as well as Crude Palm Oil Futures (FCPO) Open Interest on Bursa Malaysia Derivatives reached a 31-year alltime high. The higher trading levels resulted in the increased appetite for more Derivatives information and contributed to growth in information services income.
Total Derivatives contracts traded grew by 37% to 8.45 million in 2011, from 6.15 million registered previously, with foreign and domestic participation in the market intensifying by 59% and 31% respectively. Contracts traded for the FTSE Bursa Malaysia Kuala Lumpur Composite Index Futures (FKLI) was up by 24% to 2.48 million compared to 1.99 million in 2010. FCPO contracts increased by 45% to 5.87 million, compared to 4.06 million in the corresponding period in 2010. Average Daily Contracts Traded was up by 39% over the previous reporting period, to 34,474 contracts.
In Islamic markets, with our emphasis on wider intermediation, greater industry awareness and acceptance of Shari’ah principles through continuing education, our Shari’ah-compliant commodity trading platform Bursa Suq Al-Sila’ (BSAS) recorded an Average Daily Value of RM1.2 billion compared to RM351 million in 2010. Meanwhile, with the listing of 48 Sukuk by 17 issuers valued at USD28.5 billion, we retained our leadership position as a premier Sukuk listing destination for the third consecutive year. Other milestones were achieved during 2011: the highest trade in a day at RM4.5 billion and the largest single trade by an institution at RM3.3 billion.We also welcomed the largest dual-tranche global sovereign USD Sukuk by Wakala Global Sukuk Berhad valued at USD2.0 billion.
New listings were impacted by the uncertain market outlook, particularly towards the second half of 2011, resulting in lower funds raised from IPOs, from RM19.9 billion in 2010 to RM6.7 billion. There were 28 IPOs in 2011 and the largest notable listing by funds raised was Bumi Armada Berhad, which raised RM2.7 billion.
There were 125 secondary capital issues in 2011 as against 105 in 2010, whose total raised capital amounted to RM8.3 billion compared with RM13.1 billion recorded previously. The number of newly-listed structured warrants grew by 78%, from 204 to 363. Meanwhile, the Labuan International Islamic Exchange (LFX) recorded five new listings in 2011, bringing the total number of listed instruments to 30 at year’s end. At the end of 2011, the LFX achieved a market capitalisation of USD19.0 billion, as compared to USD19.3 billion previously.
BUSINESS REVIEW & STRATEGY
Bursa Malaysia continued to develop its core business in the Securities and Derivatives markets as well as build key differentiation through strengths in the Islamic and Commodities space. Our focus on the internationalisation of our markets gained ground when measured by increased foreign recognition and participation. For example, approval from the US Commodity Futures Trading Commission has now enabled US clients to buy or sell FKLI. This development augments the recognition of Malaysia by the China Banking Regulatory Commission as an approved investment destination for investors from China, as well as the FTSE Global Equity Index Series which promoted us from Secondary to Advanced Emerging Market status.We clearly benefited from greater visibility on the global horizon.
Closer to home, we were also better positioned to benefit from the growth of the ASEAN capital market, which has a combined market capitalisation of USD1.8 trillion. The upcoming links to ASEAN Exchanges are an important part of our business strategy, offering ASEAN integration, connectivity and cross-border investments through the collaboration of seven leading stock exchanges in the region.
On the domestic front, Malaysian Financial and Capital Market regulators have published plans for the development of their respective markets towards the government’s stated vision of becoming a developed economy and high-income nation. The government has also undertaken proactive economic and regional transformation initiatives and developed appropriate implementation platforms to execute change to achieve the vision. Together with the capital market and financial services industry plans, these overarching policy and economic frameworks and structural reforms serve as a catalyst to expand the role of the Capital Market in financing the country’s development, with Bursa Malaysia at the forefront alongside industry partners.
To equip ourselves to leverage on these developments, we revisited our business strategy and overall approach as an integrated Exchange in June 2011, with a view to adjusting our strategic priorities to be in line with the rapid domestic, regional and global developments in capital and financial market reform. In formulating our three-year Business Plan for 2011-2013, we were cognizant of the national economic and policy agendas, particularly the New Economic Model and the ETP.We were guided by our role in supporting national growth needs and aspirations, while meeting the challenges of regional competition and globalisation.
In light thereof, our long-term targets were redefined and specific initiatives to accelerate growth were reoriented, guided by five strategic thrusts.We undertook, therefore, to revitalise the market and put in place processes for ease of trading, mechanisms for regulatory simplicity and measures to foster competition and make markets more vibrant, as demonstrated by liquidity, trading velocity and volume. We undertook to improve our eco-systems whereby we would engage proactively with relevant stakeholders, i.e. policy makers, regulators, governmental organisations and industry participants to build win-win relationships and ensure optimal outcomes.We committed to improve efficiency and productivity through a more robust cost analysis and better understanding of cost behaviour.We began to develop a world-class workforce, an essential requisite for a thriving, innovative and efficient capital market, whereby our human resource systems and processes are fully aligned with our overall direction. Lastly, we started to internationalise the market through several initiatives aimed at bringing our market closer to global standards, providing easier access for foreign intermediaries and participants, and ensuring our products and services are of an international quality, necessitating the ongoing promotion of Bursa Malaysia to foreign investors.
In the meantime, recognising the demands on us to increase operational efficiency, preserve our margins and sustain our core business, as well as to support our five strategic thrusts, early steps were taken to embark upon an aggressive Organisational Transformation Programme which will enable us to realise our full potential in the marketplace at the end of five years. Specific initiatives have been identified as “trajectory-factors”, at both the organisational and market levels, to take the Malaysian capital market to new heights.
Such transformation will begin with internal restructuring as well as external market-related initiatives. Talent and technology enhancements that started in 2011 will continue into 2012 with an aggressive strategy to grow our business through the identification of new partnerships and new income streams, development and innovation of Islamic financial markets, products and services, and the expansion of our market share both domestically and internationally.
Technology has always played a vital role at Bursa Malaysia in supporting growth. In 2011 we continued to invest in technology which improved market accessibility, provided us with high capacity and delivered consistent system performance. To further improve IT Governance, an Information Security Management System was implemented in 2011 for Securities trading. We embarked on the new Derivatives Clearing System for roll-out early in 2012 which will deliver higher capacity, better performance and accessibility for market players.
To liberalise technology solution choices for participants, we intend to retire our securities broker front-end system, paving the way for participants to acquire their own solutions and thereby strengthen their growing competitiveness in the marketplace. Our Co-Location services introduced in 2009 were expanded, allowing more subscribers to place their order management systems next to our host trading system. For better speed and efficiency we also made available the Direct Market Access infrastructure for high-speed market data and trade execution.
REGULATION & GOVERNANCE
In fulfilling our regulatory role, we are committed to provide an efficient platform for capital-raising and investment underpinned by a sound regulatory framework. We see market regulation as an important building block in growing our business and we commit sufficient time and resources to raise standards while benchmarking against international best practice.
We believe we have maintained the right balance through the approaches that we have taken in regulating the market. Our key focus has always been on the following areas:
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Enhancing market quality through improvement in compliance of intermediaries; disclosure on the part of PLCs and market orderliness;
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Enhancing efficiency of regulatory services through approvals that we issue under our rules and various operational and advisory processes which we handle in relation to regulating our PLCs and brokers; and
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Improving regulatory standards and approaches by way of riskbased tools that best suit the market situation.
In the year under review, our Regulation team continued to ensure a balanced and outcome-based approach, and, to this end, our activities included development, supervision, engagement, enforcement and education of market participants. To always maintain a framework that is balanced, progressive and internationally-benchmarked, we continued with our surveillance activities while helping to raise the standard of corporate governance and, following from 2010, to encourage sustainable practices by PLCs.
Our key governance initiatives of 2011 included amending the Listing Requirements to improve quality of information, disclosure and corporate transparency, enhancing investor protection and issuing a Corporate Disclosure Guide.
OUTLOOK & PROSPECTS
The year 2011 may be summarised as a challenging one for the Exchange business globally. Despite the overall difficult market conditions, Bursa Malaysia managed to deliver a good set of results in 2011.
Going forward, Bursa Malaysia is committed to ensuring that the Malaysian market remains attractive and significant in the Securities, Derivatives and Islamic space through various initiatives that are to be undertaken in 2012 and over the next few years. As the Exchange landscape grows more competitive and presents greater challenges, innovative infrastructural enhancements and attractive product offerings are key in sustaining our relevance in the Exchange business.
In the long run, we are enthusiastic about the prospects for the Securities market. There is ample liquidity in the market and while demand for companies to tap funding more efficiently is expected to grow further, we see greater potential for Bursa Malaysia to play its role to help the government develop the economy. In the Derivatives market, we expect to benefit from the volatility in the cash market on the back of increasing needs for price risk management and hedging activities. In the Islamic segment, Malaysia as the centre for Islamic financing activities will be an important factor that works in our favour. It is therefore crucial for Bursa Malaysia to differentiate and innovate in this space to remain relevant to help Malaysia retain its position as a leading player in Islamic markets. These prospects, together with our initiatives to be embarked on under the transformation programme, will help us to further improve the overall market condition.
As part of our internationalisation efforts,we stand to gain ground from the ASEAN Exchanges opportunity which represents a regional marketplace, offering product diversity, investment mobility and the chance for Malaysia to leverage its position at the centre of trade flows in the ASEAN capital market. We remain mindful of Malaysia’s unique geographical position coupled with strong economic and multi-cultural ties in ASEAN which would give us the natural advantage to tap into the growth of the region’s advancing economies.
Global economic conditions are expected to remain increasingly challenging given the heightened uncertainty over the pace of recovery in major global economies and the Eurozone sovereign debt crisis. Hence, market volatility is expected to persist on the local equity market in 2012 until prospects of a global recovery become imminent. Nevertheless, we remain confident in the depth of our Exchange, which has demonstrated its ability to perform through difficult times.
We are further assured by Malaysia’s resilient economic fundamentals, strong domestic demand and the government’s ongoing strategic reform initiatives.We believe these will help mitigate the negative global impact on economic growth and sustain market confidence. As such, we remain confident in our ability to meet our targets for the coming year, while staying on track to become one of the most significant and progressive exchanges in the region over the medium term.
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