2. DISCLAIMER
I am NOT an investment advisor nor a financial advisor, and no information provided
here is to be interpreted as a suggestion to buy or sell securities.
You and I may have different opinion, but I respect your opinion.
All figures in MYR and in '000s, except per share data
2
4. SCOPE
• Figures and ratios are based on the figures reported in Annual Report or the latest
Q4 Quarterly Report (QR)
• Unless there is a need, this analysis will not include financial figures reported in Q1,
Q2 and Q3
• I will provide QR result highlights in my blog
• Valuation is not covered in this analysis
• I will provide valuation in my blog.
5. CHANGES
• 20 Apr 2015 – Annual Report 2015
• 14 Feb 2015 – FY15 Q4 results
• 22 Oct 2015 – First write up of PBBANK in PowerPoint format
• 3 Nov 2015 – Removed peer comparison
• 11 Nov 2015 – Applied new template
6. OTHER REFERENCES
• Bank Industry (KLSE) - Peer Comparison
• BANKING – JAN 2016 BNM STATISTICS
• Malaysian Banks Quarterly Review - 8 Mar 2016
8. BUSINESS PROFILE
• The Bank is principally engaged in all aspects of commercial banking and the
provision of related financial services
• One of the leading banking groups in Malaysia, with overseas market presence in
Cambodia, Vietnam, Laos, Hong Kong, China and Sri Lanka
• Offers a comprehensive range of financial products and services covering, amongst
others, personal banking, commercial banking, Islamic banking, investment banking,
share broking, trustee services, nominee services, sales and management of unit
trust funds, bancassurance and general insurance products
9. BUSINESS PROFILE (CONT.)
Hire Purchase Retail Operations Corporate Lending
Treasury and Capital
Market Operations
Investment Banking Fund Management Others
Domestic Operating Segments
12. TOP 5 SHAREHOLDERS
Holder Common Stock Held As At Date
% of Total Shares
Outstanding
CONSOLIDATED TEH HOLDINGS SDN BERHAD 893,918,771 26-Jan-2016 23.1%
EMPLOYEES PROVIDENT FUND OF MALAYSIA 525,224,368 6-Apr-2016 13.6%
PERMODALAN NASIONAL BERHAD 188,095,700 26-Jan-2016 4.9%
JPMORGAN CHASE & CO, PRIVATE BANKING
AND INVESTMENT BANKING INVESTMENTS 104,262,263 26-Jan-2016 2.7%
BLACKROCK, INC. 60,321,734 31-Mar-2016 1.6%
Position Date: 6 Apr 2016
13. OWNERSHIP ANALYSIS
• Main shareholders of PBBANK are Consolidated Teh Holdings and institutional
funds
• PBBANK is covered by a lot of local and foreign analysts
• This provides quite a good liquidity to this shares.
15. ECONOMIC MOATS
• Cost Advantage (Narrow)
• PBBANK enjoys extreme high net profit margin, and could be the highest among the
banks in Malaysia
• On the other hand, the banking sector is facing Net Interest Margin (NIM) compression
• NIM compression will persist in the next few years.
• Switching Costs (Wide)
• PBBANK’s wide networks, both local and also global reach
• Another important is inertia. Many people don’t switch banks, even if they feel that
they’re being nickeled and dimed by their current bank.
• The inertia is weaker nowadays. Consumers can have few bank accounts in different
bank, and change their preferred bank easily. Attractive refinancing offers provided by
other banks.
16. ECONOMIC MOATS (CONT.)
• Network Effect (Wide)
• Strong brand and leadership position in the domestic market
• Expected to continue with ETP investment momentum
• Intangible Assets (Narrow)
• The abundant of experience and strong workforce
• Widely known and well recognized by its unique brand name and its head logo
• Efficient Scale (Wide)
• Have characteristics of rational oligopolies
• Can decide to lower its prices, change its output, expand into a new market, offer new
services, or advertise. This will have powerful and consequential effects on the
profitability of its competitors
20. PROFITABILITY (CONT.)
• Using Moody’s rating system as benchmark, PBBANK’s profitability is rated as S-
(Strong-) for FY15
• To help you gauge the rating, for FY11, PBBANK’s profitability is rated as S- (Strong-)
• ROE decreased from 23.3% (FY11) to 16.2% (FY15) due to increase of tangible assets
(such as loans and investment portfolio)
• We can clearly see this in the “Net Income % Tangible Assets” chart.
26. CAPITAL ADEQUACY
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
2011-12-31 2012-12-31 2013-12-31 2014-12-31 2015-12-31
Capital Adequacy
Tier 1 Ratio Tangible Common Equity % RWA
• PBBANK increased regulatory capital, from 11.1% (FY13) to 12.6%
(FY15). This is way above Bank Negara requirement.
• “Tangible Common Equity % RWA” increased from 9.6% (FY13) to
12.5% (FY15). Again, by Moody’s standard, this is rated as M+
(Medium+).
27. FUNDING STRUCTURE & LIQUID
RESOURCES
11.0%
8.6%
9.0%
10.0%
6.8%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
2011-12-31 2012-12-31 2013-12-31 2014-12-31 2015-12-31
Market funds % Tangible Banking Assets
As of FY14, “market funds/tangible banking assets” of
PBBANK is 6.8%, which is rated as S+ (Strong+).
28. FUNDING STRUCTURE & LIQUID
RESOURCES (CONT.)
19.9% 19.7%
18.9%
22.7%
18.9%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
2011-12-31 2012-12-31 2013-12-31 2014-12-31 2015-12-31
Liquid Banking Assets % Tangible Banking Assets
Since FY11, PBBANK has been working on improving
liquid banking assets – 13.8% (FY11) to 22.7% (FY14), but
declined to 18.9% (FY15). We can rate this as M- (Medium-
).
29. FUNDING STRUCTURE & LIQUID
RESOURCES (CONT.)
87.8%
87.1%
87.5%
88.0%
90.3%
85.0%
86.0%
87.0%
88.0%
89.0%
90.0%
91.0%
2011-12-31 2012-12-31 2013-12-31 2014-12-31 2015-12-31
Loan-to-deposit ratio
LTD of PBBANK increased to 90.3%. This means PBBANK may have little
room to increase loans. After SRR was decreased, PBBANK will be one of
the main beneficiaries in short term.
32. GROWTH DRIVERS
• 25 Jul 2014 – To focus more on commercial property loans and loans to civil
servants with higher yields
• 25 Jul 2014 – After the completion of its acquisition of another 50% equity in VAD
Public Bank (VPB) presently held by Joint Stock Commercial Bank for Investment and
Development of Vietnam (BIDV), VPB will be converted into a 100% owned foreign
bank.
33. GROWTH DRIVERS (CONT.)
• 25 Jul 2014 – While PBBANK is expected to continue to have tight credit control,
hence solid quality, the concerns of heightening credit cost remains due to higher
living cost that would potentially impact borrowers’ affordability
• 25 Jul 2014 – To maintain low CIR due to excellent cost control and operating
efficiency, ie. CIR of ~30% for the next 2 years
• 6 Jul 2015 – Public Bank strengthens collaboration with Japan’s Resona Holdings
• 21 Jan 2016 - BNM announced the decrease in the Statutory Reserve Requirement
(SRR) Ratio from 4.00% to 3.50%, effective from 1 Feb 2016
• PBBANK probably can reduce LTD to 86%-88%, so they can give out more loans
• They can enjoy some improved earnings, plus their loan quality is the best among the
peers.
35. ISSUES/RISKS/CHALLENGES
• ROE on declining trend and is set to decline further after the completion of right
issue exercise. Analysts are expecting ROEs of 18.6% and 16.7% for FY14 and FY15
respectively
• 6 Feb 2015 – The impact on the rebalancing of loan portfolio towards the margin
compression will still be significant in FY15 but the impact will gradually taper off
over the next 3 years with smaller impact in the latter years.
36. ISSUES/RISKS/CHALLENGES (CONT.)
• 6 Feb 2015 – Management highlighted that the slowdown in residential property
loans was part of the Group’s strategy to be conservative and to avoid financing
properties for speculation purposes and focus on the mass market for financing of
affordable houses. Elsewhere, HP financing gained momentum slightly to a growth
of 7.5%yoy. The Group remained as leader in domestic passenger vehicle financing
with an improved market share of 28.1%
• 31 Jul 2015 – Slower loan momentum for Hong Kong and China and the other
countries
37. ISSUES/RISKS/CHALLENGES (CONT.)
• Tighter lending rules and slower loan growth – weaker-than-expected NIMs
• Slower than expected ETP projects rollouts
• Keener competitions and hence further margin squeeze
• Sharp turn in NPLs hence higher credit charge
• Potential asset quality pressure arising from changing macroeconomic environment
• Competitive landscape to put further pressure on loan pricing & funding costs
• Deterioration in asset quality
• Adverse foreign exchange movements.
39. SWOT ANALYSIS
• Strength
• One of the top 3 banking group in Malaysia by asset size
• Public Bank Group serves the financial needs of over eight million customers from all
walks of life in Malaysia and in other countries in which the Group operates
• Unbroken profit track record of the Group
• Leader in residential mortgages, passenger vehicle financing and commercial property
financing in Malaysia
• Lowest cost-to-income ratio in the industry
• Lowest impaired loan ratio
40. SWOT ANALYSIS (CONT.)
• Weakness
• Only a regional player and limited global presence
• Need more branches as the reach is scarce compared to leading banks
• May have to raise more cash to meet Basel III requirements
• Continued intense competition may suppress net interest margins
41. SWOT ANALYSIS (CONT.)
• Opportunities
• Overseas Operations and collaborations
• Business diversifications like Insurance and Mutual funds
• New business specific products for Small and medium scale enterprises
• Room to grow more fee based income
• Public Mutual to continue its strong performance
42. SWOT ANALYSIS (CONT.)
• Threats
• Increasing competition in home mortgages will inevitably result in some compression of
the net interest margin
• Sovereign Debt crisis in the Euro Zone
• Higher capital requirements under Basel III
• Fierce competition in the domestic banking market
• More stringent rules to lending introduced by BNM
48. FY16 KPI TARGETS
• PBBANK announced its FY16 KPI targets which were slightly lower than FY15
• ROE>15
• RWCR of >13%
• GIL ratio < 1%
• CI ratio < 33.0%
• Group loan growth of 8-9%
• Group deposit growth of 7-8%.
49. GOING FORWARD
• Moving forward, I believe that PBBANK result will be stable or a bit slow down. This
is because loan applications will continue to be slow marginally and NIM
compression will be higher in the future
• PBBANK is expected to maintain its leading market position in the domestic retail
segment, supported by continuing demand in home mortgages, vehicle financing
and small and medium enterprises ("SME") lending
Editor's Notes
To measure a bank’s efficiency and its ability to generate incremental profits with added revenue, I will use “Cost to Income” which is available in every bank’s financial report. The lower it is, the more profitable the bank will be.
A bank’s asset risk is fundamental to its creditworthiness because its high leverage implies that a small deterioration in the value of its assets has a large effect on solvency. These risks are captured, to a considerable degree, by a single financial ratio, problem loans/gross loans (which we term the problem loan ratio). As loan quality deteriorates, the problem loan ratio rises, signaling potential problems, credit losses and consequent pressure on solvency that disadvantages bondholders by reducing the earnings and equity capital buffers that protect them.
A bank’s funding structure has a strong bearing on its potential need for assistance because some sources of funds are less reliable than others. This implies that a bank making significant use of an unreliable funding source – perhaps short-term in nature, from particularly risk-sensitive counterparties – is more likely to suffer periodic difficulties in refinancing its debt. All other variables being equal, this puts it at greater risk of needing support. The primary ratio is “market funds/tangible banking assets”. This ratio expresses the proportion of the balance sheet that credit-sensitive investors and counterparties fund; as such, it measures liability-side volatility and the resultant liquidity risk.
An assessment of the liability-side structure of a bank has to be seen in the context of its asset side. A bank can reasonably borrow from credit-sensitive investors if it has corresponding assets in the form of high-quality liquid instruments that it can sell or repo for cash in response to its funding counterparts’ changing behaviour. The primary ratio is “liquid assets / tangible banking assets”. This provides an offset to the “market funding / tangible banking assets” ratio above. Moody’s study shows that banks with relatively low levels of liquid assets had a higher tendency to require support.
To measure whether a bank still has buffer to increase loans, the primary ratio is Loan-to-deposit ratio. This ratio is particularly useful to assess potential growth of a bank by measuring conversion rate of deposits to loans. If the ratio is too high, it means that banks might not have enough liquidity to cover any unforeseen fund requirements. If the ratio is too low, banks may not be earning as much as they could be. 75% to 90% can be considered as healthy range. Besides, we should also compare ratio of a bank with its peer.
Market Risk Appetite aims at capturing the sensitivity of both the trading and non-trading books to major changes in key financial variables (including interest rates, FX, equity prices, credit spreads). In assessing a bank’s market risk appetite, our starting premise is that the fundamental relationship between risk and expected return indicates that the greater the risk, the higher the expected return. As expected return increases, the volatility of returns, and so the size of potential unexpected losses, increases. Conversely, as expected return decreases, the volatility of returns and so the size of potential unexpected losses decreases.
