PBBANK – Fundamental Analysis (31 Jul 2015)

At the time of writing, I owned shares of PBBANK.
  1. 31 Jul 2015 – First write up of PBBANK using new style, and covers FY15 Q2 results.


The Bank is principally engaged in all aspects of commercial banking and the provision of related financial services. The Public Bank Group is one of the leading banking groups in Malaysia, with overseas market presence in Cambodia, Vietnam, Laos, Hong Kong, China and Sri Lanka. The Public Bank Group 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.

The Group’s domestic business, which also includes Islamic banking business, is organised into the following key operating segments:

  1. Hire Purchase – The hire purchase operations focus on the provision of passenger vehicle financing to all levels of customers.
  2. Retail Operations – Retail operations focus on providing products and services to individual customers and small and medium enterprises. The products and services offered to customers include credit facilities (mortgages, trade and personal loans), credit cards, remittance services, deposit collection and investment products.
  3. Corporate Lending – The corporate lending operations cater to the funding needs of large corporate customers which are primarily public listed companies and their related corporations.
  4. Treasury and Capital Market Operations – The treasury and capital market operations are involved in proprietary trading in treasury related products and services such as foreign exchange, money market operations and securities trading.
  5. Investment Banking – The investment banking operations cater to the business needs of large corporate customers through the provision of financial solutions and direct lending. The services offered include structured financing, corporate advisory services, merger and acquisition, stock-broking and debt restructuring advisory services.
  6. Fund Management – The fund management operations consist of sale of trust units and the management of unit trust funds as conducted by the Bank’s wholly-owned subsidiary company, Public Mutual Berhad.
  7. Others – Others refer mainly to non-core operations such as property holding.

The Group’s overseas business operations are organised according to the following geographical locations:

  1. Hong Kong SAR – This includes all business operations conducted by the Group’s subsidiary companies in Hong Kong SAR and the People’s Republic of China, including retail and commercial banking and lending, wealth management services, stock-broking and other related financial services.
  2. Cambodia – This comprises all business operations conducted by the Group’s subsidiary companies in Cambodia, which includes mainly financing, deposit-taking, general insurance businesses and stock-broking.
  3. Other Countries – This refers to the Group’s banking business operations in the Socialist Republic of Vietnam, Lao People’s Democratic Republic and Sri Lanka.


Main shareholders of PBBANK are Consolidated Teh Holdings and institutional funds. Besides, PBBANK is covered by a lot of local and foreign analysts. This provides quite a good liquidity to this shares.



Economic Moats

Cost Advantage – Narrow

  • PBBANK enjoys extreme high net profit margin and FCF/Sales, 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
  • I don’t have statistics, but based on my observation, people tend to stick with PBBANK due to branding.
  • 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.

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


From FY10 to FY14, pre-provision operating income of PBBANK constantly increased 5.8% yearly. Nevertheless, its ROE decreased from 23.3% (FY11) to 16.1% (FY14) due to increase of tangible assets (such as loans and investment portfolio). We can clearly see this in the “Net Income % Tangible Assets” chart.

Using Moody’s rating system as benchmark, PBBANK’s profitability is rated as M+ (Medium+) for FY14. To help you gauge the rating, for FY11, PBBANK’s profitability is rated as S- (Strong-).




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.

In the past 5 financial years, PBBANK maintained its cost-to-income in the range of 29%-31%. Efficiency of PBBANK can be graded as A.


Asset Risk

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.


As above, by Moody’s standard, PBBANK’s asset risk can be rated as VS+ (Very Strong+). This also indicates that PBBANK is very strict in loan approval.

Capital Adequacy

I use to two ratios to measure bank capitalization: “Tier 1 Ratio” and “Tangible Common Equity % RWA”. PBBANK increased regulatory capital, from 11.1% (FY13) to 12.8% (FY14). This is way above Bank Negara requirement.

To assess whether PBBANK increased the regulatory ratio with tangible assets, we can use “Tangible Common Equity % RWA” – 9.6% (FY13) to 12.2% (FY14). Again, by Moody’s standard, this is rated as M+ (Medium+).



Funding Structure & Liquid Resources

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.

As of FY14, “market funds/tangible banking assets” of PBBANK is 10.0%, which is rated as S (Strong).


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.

Since FY11, PBBANK has been working on improving liquid banking assets – 13.8% (FY11) to 22.7% (FY14). We can rate this as M (Medium).


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.

The following chart shows loan-to-deposit for PBBANK, and the range is between 87% to 88%. We will compare this with other banks later.


Market Risk Appetite

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.

Market Risk Appetite of PBBANK is less than 10% where this can be rated as A.


FY15 Q2 Results

2Q15 vs. 2Q14, QoQ

2QFY15 net profit of RM1.19b (+2.2% qoq, +13.3% yoy) led to a cumulative net profit of RM2.37b (+14.2% yoy). The improved earnings was mainly due to higher net interest income, higher net fee and commission income and higher investment income partially offset by higher other operating expenses.

NIM further contracted by 4bp qoq to 2.11% in 2QFY15. This was contributed by (MIDF 31 Jul 2015):

  1. Continuous rebalancing of its loan portfolio towards mortgage loans with lower financing rates and
  2. Higher COF from strong competition for deposits. Management has guided a NIM compression of up to 12bp for FY15 contributed largely by higher COF.
  3. Also contributing to the drop in NIM will be the decline in yield on the Group’s retail loans as a result of portfolio rebalancing as aforementioned.

However, the impact of portfolio rebalancing on NIM contraction will be smaller than that of the rise in COF and will gradually taper off, hence impacting NIM only by a few basis points moving into FY16.

1H15 vs. 1H14, YoY

Pre-provision operating profits in 1HFY15 was up by +11.0% yoy contributed by higher net income of +10.0% yoy with a rise in NII (+9.5% yoy) and NOII (+15.3% yoy). Net profit attributable to equity holders improved by RM295.0 million or 14.2% to RM2,368.3 million. The improved earnings was mainly due to higher net interest income of RM269.0 million (9.5%), higher net fee and commission income of RM88.9 million (13.3%), higher investment income of RM22.4 million (22.3%) and higher income from foreign exchange business of RM25.8 million (20.7%). These were partially offset by higher other operating expenses of RM103.1 million (7.8%) mainly due to higher personnel costs which were in tandem with the increased headcount to support business expansion.

Gross loans grew by RM26.6 billion or 11.5% to RM258.8 billion as at 30 June 2015 as compared to RM232.2 billion as at 30 June 2014, driven by growth in property financing, financing of passenger vehicles and lending to small and medium enterprises (“SMEs”). Total deposits from customers increased by 11.6% or RM30.8 billion to RM295.3 billion as at 30 June 2015 which partly contributed to the higher net interest income for the current period. PBBANK’s impaired loan ratio further improved to 0.54% as at 30 June 2015.

The growth in the PBBANK’s profit was driven by continued healthy loans and customer deposits growth coupled with sustained strong asset quality, as well as gains arising from foreign exchange fluctuation in respect of the PBBANK’s foreign operations.

Peer Comparison


The following charts compare profitability of PBBANK with other local banks for FY14.

  1. In term of “Net Income % Tangible Assets”, from FY10 and FY13, PBBANK was the champion, but in FY14, AMMB took over the crown. AMMB managed to achieve this because they boosted the loan-to-deposit to 97%. This strategy is not sustainable in long term.
  2. For “Return on Equity”, from FY10 and FY13, PBBANK was the champion, but in FY14, BIMB took over the crown. in FY14, BIMB reduced substantial amount pay out to “Non-controlling Interests” – from 283,827 (FY13) to 54,575 (FY14).
  3. As for “Net Interest/Income Margin”, PBBANK is at the middle of the table. BIMB, CIMB and AMMB are the top 3, but later we will look into the quality of loans.



As you can clearly see, cost-to-income of PBBANK obviously is the lowest in this industry. It means that PBBANK is the most efficient bank.


Asset Risk

Quality of loans of PBBANK is obviously the best in the industry. Despite NIM of CIMB, AMMB and RHBCAP are higher than PBBANK, you can see quality of loans of the three banks are not good.


Capital Adequacy

Regulatory capital of all banks already met Bank Negara’s requirements.


Funding Structure & Liquid Resources

  1. Loan-to-Deposit – PBBANK is at the middle of the table. Compare MAYBANK and CIMB, PBBANK still has a small room to increase loans (if they want to).
  2. Market funds % Tangible Banking Assets – Compare to MAYBANK and CIMB, liability-side volatility and liquidity risks of PBBANK is quite low.
  3. Liquid Banking Assets % Tangible Banking Assets – Although PBBANK is at the middle of the table, compare to other banks, in the past 5 years, PBBANK has been increasing their liquid banking assets constantly.



Market Risk Appetite

PBBANK is a very conservative bank in taking market risk. You can see how high market risk appetite of CIMB is, and what happened to CIMB performance now.


Growth Drivers

  1. 25 Jul 2014 – To focus more on commercial property loans and loans to civil servants with higher yields. Moving ahead, price pressure on loans and funding pressure will continue but is likely to be partially mitigated by the repricing of loan rates following the recent 25bp rise in OPR. Management plans to focus more of lending to SMEs for purchase of commercial properties as well as grow the Group’s lending to civil servants with repayment through Angkasa’s direct salary deduction scheme. These financings will be higher in yields to defend its NIM. The lending to civil servant will the through its arrangement with an agency which already has access to the Angkasa code. The other plans to defend its NIM will be through expanding of CASA deposits as well as increasing the mix of retail CASA relative to its wholesale CASA.
  2. 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. Management highlighted that VPB will focus on consumer/retail banking. The acquisition of another 50% equity will enable the Group to fully own VPB. This will allow it to accept savings deposits like other banks in Vietnam. In addition, it also allows the Group to operate VPB with its own business model.
  3. Internal growth drivers:
  1. 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. Analysts have imputed in <20bps in credit cost. Note that before FY12, credit cost of PBBANK was ranging from 45bps to 60bps.
  2. 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
  • The business collaborations with Saitama Resona Bank and Kinki Osaka Bank will further facilitate Public Bank’s customers to benefit from the potential and established franchise in Saitama Resona Bank’s home market, Saitama Prefecture, and Kinki Osaka Bank’s home market at the Osaka Prefecture
  • The collaborations would allow the banks to leverage upon their respective strengths and expertise and enable them and their respective affiliates to establish and promote to their respective customers appropriate banking products and services in Malaysia and Japan.


  1. 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.
  2. NIM compression
    1. Continuous rebalancing of its loan portfolio towards loans with lower financing rates
    2. The impact of higher COF from strong competition in particularly retail deposits due to implementation of LCR requirements on banks effective 1 June 2015
    3. 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. COF has risen with the increase in rates for retail and wholesale/corporate deposits. Management has guided for NIM to contract by 8-10bp in FY15.
  3. 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%.
  4. Other risks
  1. Tighter lending rules and slower loan growth – weaker-than-expected NIMs
  2. Slower than expected ETP projects rollouts
  3. Keener competitions and hence further margin squeeze
  4. sharp turn in NPLs hence higher credit charge
  5. Potential asset quality pressure arising from changing macroeconomic environment
  6. Competitive landscape to put further pressure on loan pricing & funding costs
  7. Deterioration in asset quality
  8. Adverse foreign exchange movements
  • 31 Jul 2015 – Slower loan momentum for Hong Kong and China and the other countries


Historical EY%

  • Trailing:
  • FY14 (BPS: 7.674) – 19.90 (Uncertainty Risk: HIGH)
  • Current (BPS: 7.593) – 19.69 (Uncertainty Risk: HIGH)
  • Forward:
  • FY15 (BPS: 7.663 ± 5%) – From 18.88 to 20.87 (Uncertainty Risk: HIGH)
  • FY16 (BPS: 8.389 ± 5%) – From 20.67 to 22.84 (Uncertainty Risk: MEDIUM to HIGH)
  • BPS applied to reach the current stock price (18.98): 7.319

I think fair value of PBBANK is from 20.67 to 22.84.

Returns to Shareholders

To maintain capital adequacy, in general, banks unlikely to maintain high dividend payout.


Going Forward

Despite unexpected good results of PBBANK in Q2FY15, 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.

I will continue to hold this share, and accumulate it when there is a dip in the price.


Excel – http://1drv.ms/1MWTr8a

Notes – http://tinyurl.com/popzxf3

2Q15 Quarterly Report – http://www.bursamalaysia.com/market/listed-companies/company-announcements/4814941


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