This article first appeared in The Edge Malaysia Weekly, on February 1 - 7, 2016.

Lembaga Tabung Haji’s depleted reserves were brought to the public’s attention when a letter from Malaysia’s central bank to the fund’s top management was leaked to the media last Tuesday. The pilgrim fund’s reserves have been substantially depleted due to the practice of paying bonuses that have exceeded its earnings since 2012.

A look at Tabung Haji’s 2014 annual report reveals that in 2012, the fund paid RM2.46 billion in bonuses — at a rate of 8% — to its depositors, although net profit came in at only RM2.15 billion. Then in 2014, it did the same, paying out RM3.24 billion to depositors — at a rate of 8.25% — even though it only earned RM2.98 billion (see Table 1).

The 8.25% bonus rate in 2014 was the highest since 1998, according to Tabung Haji’s annual reports. 

Interestingly, in the same period, when it obviously dipped into its reserves for the higher payouts, the growth rate of depositors’ savings exceeded that of its assets. Depositors’ savings doubled between 2010 and 2014 while its net assets expanded by 90.9% (see Table 2).

“The key point is, why did Tabung Haji continue to pay high dividends [bonuses] when it wasn’t supported by [a similar increase in] income growth?” asks an economist with a local asset management fund.

“The point of having reserves is to smooth out fluctuations in returns from year to year. So, save in a good year, run it down in a bad year. But it seems like they have been running it down even in the good years.”

Since reaching a low of 3.25% in 2001, Tabung Haji’s bonus rate has been on an upward trend. In 2005, the bonus rate was 4.5% while in 2010, it increased to 5.5%.

To recap, in the leaked Bank Negara Malaysia letter dated Dec 23, 2015, governor Tan Sri Dr Zeti Akhtar Aziz reminded Tabung Haji chairman Datuk Seri Abdul Azeez Abdul Rahim that the fund only had 98 sen of assets for every RM1 in liability.

Note that Section 22 of the Tabung Haji Act says the fund cannot announce dividends and bonuses to its depositors if its assets are worth less than its obligations.

Bank Negara did not stop with that reminder. On the same day, Zeti also sent a letter to the minister in charge of Islamic affairs, Datuk Seri Jamil Khir Baharom, to warn him that Tabung Haji’s finances could have a financial impact on the government as depositors’ savings are guaranteed, according to the Tabung Haji Act.

Tabung Haji has not revealed its financial performance for the year ended Dec 31, 2015 (FY2015), but the leaked letter has raised concerns over its ability to pay bonuses to its depositors for FY2015.

In response, Tabung Haji has given the assurance that it can still do so and that depositors’ savings are intact. The quantum of the bonus payout, however, will depend on the fund’s FY2015 performance.

“Last year was a challenging one for us but due to our asset allocation strategy and risk management, we have managed to record a good performance,” Tabung Haji CEO Tan Sri Ismee Ismail said in a statement following news of the leaked letter.

“However, Tabung Haji has to be prepared to face the challenging economic environment in 2016 and in the future so that it becomes more competitive. Therefore, we have to take into account the current economic situation in setting bonus rates,” added Ismee, who took the helm of the pilgrim fund in 2006.

According to the statement, the assets and liabilities cited by Bank Negara in the letter do not take into account the current market value of equity investments under Tabung Haji’s subsidiaries and associate companies as well as its plantation and real estate assets.

However, Tabung Haji’s equity investments last year do not look rosy, thanks to the bearish local equity market since the collapse in crude oil prices and slowdown in domestic and external economic growth.

The FBM KLCI fell 3.44% in 2015 while the broader FBM EMAS came in 2.01% lower.

According to Bloomberg, Tabung Haji’s largest holdings in Malaysian stocks by value are its shares in BIMB Holdings Bhd, followed by Sime Darby Bhd, Maxis Bhd, 

TH Plantations Bhd, Malakoff Corp Bhd, Petronas Chemicals Group Bhd, IJM Corp Bhd, and Gamuda Bhd.

Besides BIMB, in which Tabung Haji is the largest shareholder with a 52% stake, the fund is also the largest shareholder in TH Plantations with a 78.82% stake, and holds more than 10% equity interest in Malakoff, Malaysian Resources Corp Bhd, WCT Holdings Bhd, MCT Bhd and Pelikan International Corp Bhd.

Of the fund’s top 10 stock holdings, only Maxis, Petronas Chemicals and IJM turned in a positive share price performance last year (see Table 3). The worst performing stock among the 10 was TH Plantations, which saw its share price drop 30.5% last year to RM1.16 as at last Thursday.

TH Plantations has been hit by the drop in crude palm oil prices since 2011. Its earnings more than halved to RM17.9 million in the nine months ended Sept 30, 2015 (9MFY2015), from RM38.2 million in the previous corresponding period.

Tabung Haji is also the largest shareholder in TH Heavy Engineering Bhd (THHE), a loss-making oil and gas fabrication and construction company. THHE’s losses widened 54% to RM30.2 million in 9MFY2015, from a net loss of RM19.5 million in the previous corresponding period.

The fund is also the largest shareholder of information technology company Theta Edge Bhd — which has been loss-making since 2010 — with a 68.7% stake. As at Sept 30, 2015, Theta Edge was still in the red with a net loss of RM6.65 million.

Besides the fund’s holdings in public-listed companies, it also invests in real estate. Among its real estate holdings are Menara TH in KLCC’s Platinum Park, several hotels in Saudi Arabia, three office buildings in the UK and a Grade A office building in Melbourne, Australia.

Perhaps the most notable real estate acquisition undertaken by Tabung Haji recently was its purchase of a 0.64ha parcel in Tun Razak Exchange (TRX) from 1Malaysia Development Bhd (1MDB) last year for RM188 million, on which it intends to develop a residential tower.

The purchase drew criticism from the public as it was done at 43 times the price paid by 1MDB when the latter acquired the TRX land from the federal government. Tabung Haji chairman Azeez later said the fund would sell the land and realise gains, although no deal has been announced to this day.

To be fair, the problem with its liabilities outweighing its assets — which pushed its reserves into the red — lies mostly in the fund sustaining its high bonus rates. So unless there is a run on the fund by its depositors, Tabung Haji’s situation should be manageable, says the economist.

“As long as everybody doesn’t try to withdraw all at once, Tabung Haji should be okay,” he adds.

There may be no immediate risks but it is always better to be safe than sorry and rein in the numbers before things take a turn for the worse.

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