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Author: Choivo Capital   |   Latest post: Sat, 28 Mar 2020, 5:36 AM

 

(CHOIVO CAPITAL) A Quantitative Summary of Malaysian Banks (Bench-marked against Singaporean Banks)

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For a copy with better formatting, go here, its alot easier on the eyes.

A Quantitative Summary of Malaysian Banks (Bench-marked against Singaporean Banks)

========================================================================

Introduction

Well, given the fall in prices for Malaysian Banks recently (much of it due to the two recent rate cuts, expected additional cuts in the future, and foreign fund outflows), i decided to embark on a surface level study of the numbers for all the banks in Malaysia, and to benchmark them against those of the Big 3 in Singapore.

As usual, our Malaysian champion Public Bank hits it out of the park when it comes to Cost to Income Ratio (calculated by dividing the operating expenses by the operating income generated i.e.net interest income, net insurance income plus the other income).

However, that is not the be all end all as you will read in my comments below, Public Bank is currently facing serious challenges.

And as usual, Malaysian Banks and Stocks, are valued much higher when compared against Singapore or South East Asia, mainly due to wanton buying by our sovereign funds.

The Risk Free Rate/ FD Rate in Singapore is 1.6%, while in Malaysia it is at least 3.3% - 3.9% in Malaysia. (Ps, for the highest FD rates, go to MBSB, they actually gave me 4.25% before the rat cut).

Despite this DBS, a very well managed bank is only valued at PE10, which in Malaysia, until recently, most banks sold for far higher than that.

In any event, it was fun doing it, let me know what you guys think.

 

 

Summary

 

 

 

Individual Banks

 
Alliance Bank Malaysia Bhd
 

From here, we can see historically, performance of the bank is fairly decent. Cost to Income is largely maintained, which is really good. Profit is maintained despite ongoing deleveraging, mainly from better loan books.

Given the balance of probabilities, i would think the London Biscuit fiasco is a outlier. At the current price of something around 6PE normalized earnings, seems cheap.

In addition, according to an insider in Alliance Bank, they have tightened their credit underwriting across the board since the recent credit loss, which is good for the long term, but also a headwind to loan growth (which i have no problem with).

 

 

AEON Credit Service (M) Berhad

One of the best performer in this bunch, if not the best. Cost to Income for 2019 shot up from new marketing initiatives to better bundle their products.

Seem particularly attractive as given that the recent fall in share prices from adoption of MFRS 9, which had zero impact on the economics of the business.

 

 

Affin Bank Berhad

Just a shit bank, by far the worst in this group.

If you didn't know this from them building a new HQ worth 15% of their market cap, and more than 1 year's earnings.

The numbers just proved it.

 

 

AMMB Holdings Berhad 

 

Well, they definitely got beaten down after the 1MDB scandal erupted. Cost to Income ratio is way up. Their little brother RCECAP is doing more than fine though

 

 

Bank Islam Malaysia Berhad 

Highest leveraged bank in Malaysia. They've been trying to reduce this by doing dividend reinvestment schemes. What i find quite interesting, is that their loan book seems fairly good (based off ROA).

Considering this is owned by Tabung Haji, i can't imagine the management being world beaters, as evidenced by their high Cost to Income Ratio.

My guess is that there must be something in the name Islam, that makes people feel like they definitely have to pay back their debts.

Also most GLC's tend to just buy insurance from Takaful. So there's that.

 

 

CIMB Group Holdings Bhd

Cost to income ratio seem bad, especially given their size. Reading the annual reports and seeing the numbers, i'm not inspired.

 

 

ELK-Desa Resources Berhad

One thing to note, this is not exactly a financial institution, as furniture consist of a relatively large portion of the revenue and cost. So i actually may not make much sense to analyse it this way.

Seems like a weird combination, would prefer them to be separate.

 

 

Hong Leong Bank Berhad 

Loan book quality is great, as evidenced by their ROA, lowest leveraged bank (not counting MBSB which only just became a bank). Very interesting.

 

 

Malayan Banking Berhad 

Malaysia Daikor, given the economy of scale, its no surprise they managed to keep/reduce the Cost to Income ratio.

Insurance division growing, but also making less money. Seems ok, but not inspiring.

 

 

Malaysia Building Society Berhad

Lowest cost to income ratio among all the deposit taking banks. Talk about a surprising result.

I think its mostly from the fact they only just turned into a bank, and quite frankly do not have the same reach as most banks. Which may actually be a good thing.

Still, i would not actually believe their Loan Book quality yet, as the high ROA's in recent year is due to write backs from heavy kitchen sinking in 2016 and 2015.

 

 

Public Bank Berhad

Other than MBSB (which i consider an anomaly), Public Bank has the lowest cost to income ratio. No surprises here. But in recent years, this ratio have crept up. This is mainly due to their loan books being primarily housing, which is in the doldrums, resulting in lower revenue growth. Growth in cost however, did not.

Historically, Public Bank have avoided Corporate Banking (except to chinaman companies who don't need the money), which is one of the reasons their profit's are so great.

However, in days when housing/property loan market is drying up, this is biting them in the ass. I have no idea what PBBANK should do, as i would rather avoid corporate banking, other than to really expand into Cambodia and Vietnam.

Now, one would think that its worth it at the current price, but as you can see later when bench-marked against Singapore.

Malaysian banks and stocks are usually overvalued. You can buy DBS for 20% cheaper valuation wise.

 

 

RCE Capital Berhad

Quite like this one. As I've written here before.

Lets talk about RCE CAPITAL (RCECAP)

The Black Swan Hidden in RCE CAPITAL (RCECAP)

 

 

RHB Bank Berhad

Nothing special, or particularly bad about it. Given the prices of Singaporean banks, i wouldn't say its cheap either.

 

 

Singapore Banks

DBS Bank Ltd

Voted best managed bank in South East Asia, numbers look very good.

ROA is thin as hell, which in retrospect, is not surprising, given that all the banks in Singapore are run by Chinaman/Chinese. So very very strong competition.

Also, its about 10PE.

Considering SGD risk free rate is sub 2%, while our's is about 3.3%, when compared against pretty much any bank in Malaysia, its a bargain.

Worth a deeper study.

 

 

Oversea-Chinese Banking Corporation, Limited,

Also known as Orang China Bukan Cina Bank.

Numbers don't look as good as DBS's. The other 2 of the Big 3 in Sg.

Having said that, both UOB's and OCBS's numbers are not that far off from DBS's.

 

 

United Overseas Bank Limited

Numbers don't look as good as DBS's. The other 2 of the Big 3 in Sg.

Having said that, both UOB's and OCBS's numbers are not that far off from DBS's.

 

 

 

The Real Risk

Over the last few months, they've been much buzz in the Malaysian Markets on how these rate cuts will decimate the earnings of the banks. 

Well, in my opinion, rate cuts don't matter as much to the earnings of the banks over the next 10 years as one would think it would. At most it will effect its earnings for the next 3-6 months, as the fixed deposits paying high rates mature. These fixed deposit rate tenures are quite short most of the time anyway, with the longest being at most one year.

There are two real danger that banks face, they are,

 

 

  • Negative Interest Rates

Thankfully, we are not here yet. At least not for the foreseeable future.

The problem with negative interest rates is that, in the event that actually happens, most banks would be extremely hesitant to actually charge people money for keeping money in their bank accounts, thereby severely dropping Net Interest Margin as interest rates on borrowings fall in tandem with the now negative interest rate.

I'm not going to speak much more about this, as i'm sure many of us here have read multiple articles this by now.

 

 

  • Yield Inversion

Yield inversion happens when long term interest rates actually fall below that of short term interest rates.

Now this is quite an abnormal circumstance in financial markets. Normally, short-term interest rates are below long-term interest rates, indicative of the fact that investors require more return for keeping their money tied up for longer.

But, when investors expect that a slowdown is coming, they don’t care about getting more return for keeping their money tied up. They just want to lock in yield. So, they pile into instruments with the best yields, which are long-term fixed income instruments. That flight into safe-haven assets pushes long-term bond prices up.

Alternatively, investors may be expecting that rates will fall in the short term, and in fear of not being able to renew their current bonds at similar interest rates, they then decide to buy longer dated bonds. 

I won't be elaborating much further on this as i'm sure that most here would have also read a lot on these, as its been happening everywhere around the world. But what many may not know, is that in Malaysia, the yield curve have also inverted.

 

The inversion was particularly severe last week, right before the rate cut, which normalized things somewhat.

Now, why is this a bad thing for banks? Its simple, banks take in short term deposits but give out mid-long term loans. If your short term deposit rate is based on the short term MGS interest rates, while your mid-long term loans is based off the lower mid-long term MGS interest rates, well, that will severely impact your profits.

Thankfully, to an extent, by and large, Malaysian Banks do not really tie their borrowing rates to mid-long term MGS, instead adopting a BLR+XX% policy.

 

 

Still these are two things to ponder about when thinking about banking stocks.

Negative interest rates was almost always considered to be a theoretical scenario, none of the great economist we study, Keynes and Hayek etc, ever thought it could happen or last for a long time, and yet here we are, with most sovereign bonds at negative interest rates (starting with the EURO, SWISS Bonds etc since 2013).

Still, i don't think one should rely on your conclusions (no matter how clear cut you think they) on the above two things when thinking about buying a banking stock. 

There are some topics (like this one) so complex and opaque, that one needs to be highly educated and well versed in the subject, in order to be unclear about the conclusions and be unable to come to an opinion.

The conclusions to the above two scenarios will only seem clear in retrospect. At the end of the day, we need to look back to the fundamentals of the banks.

 

 

Conclusion

At current prices, other than ABMB, RCECAP and AEONCR, the rest quite frankly just don't look that attractive to me.

I'm seriously considering PBBANK and HLBANK, but their prices needs to drop below RM15 and RM12 before it makes sense to me.

As always, do let me know what you think and if you guys have any comments.

Disclaimers: Refer here.

 

====================================================================

Facebook: Choivo Capital
Website: www.choivocapital.com
Email: choivocapital@gmail.com

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  5 people like this.
 
teoct Thank you so much for all the hard work and sharing here.

Yes, I am also looking at DBS vs PBB. You have reinforced my conviction that DBS is a good buy. My take is DBS is in China, HK, Taiwan, India and Indonesia while PBB depended on Malaysia, while HK, Vietnam, Cambodia and Sri Lanka are small, very small.

India and Indonesia are still just breaking even to small loss, but the potential of these 2 markets is many time bigger than those of PBB.

And DBS is embracing tech in a big way compared with PBB. This is another plus point that should keep cost at bay going forward.

Thanks again and happy investing.
06/03/2020 8:58 PM
Flintstones Good article.
06/03/2020 9:24 PM
Philip ( what you can learn from RJ MITTE ) It's interesting how quantitative and qualitative approaches differ. You used pe, income and return on equity to judge the quality of a bank

For me the more important criteria I look for in a bank is the loan impairments ratio and the loan profile. My idea of the perfect bank is a huge savings and fixed deposit accounts, and a every loan protected by solid collateral.

All the criteria you used to define a banks quality leave out the loan profile and the inherent risks in those loans.

During the subprime crises all the investors only looked at how much they made, not the risk they take to make the money. In fact, only a few analysts tracked the loan impairments ratio, and the income group of the individuals making the loans.

When I bought public Bank in 2012, this became the core tender of my investing policy.

In scuttlebutt terms, " how much leverage is the bank giving out to the corporate company in relation to their assets and ability service the debt".

My ex company was able to borrow 25 million in cash and 25 million in overdraft, all with 10 million in assets simply by raising paid up capital to 10m and having a fixed deposit of 5 million and property values at 5 million.

The car loan I have on the other hand, is based on a 5 year loan with a collateral on the car worth 368,000, and where the interest is paid first during the first 1 year, and the principal paid off after that.

If you have ever borrowed money to your friends and family, you will know borrowing money is a risky business. Assuming that your friends will pay you back with interest and expanding out into the next 5-10 years is a very risky risky business indeed.

Maybank had hyflux. Alliance Bank has London biscuit.

You are saying it won't repeat. How do you even know who they loan to?

All I can say is, if you are someone that likes margin of safety, you should find the margin of safety in banks, aka how much profit does the bank gain in relation to the risk it takes from its customer group.

In any case, you should update your graph with their annual impairments of loan profile, their client base breakdown and the growth of those safe loans profile.

It's all there hidden deep in the notes.

Where most of the important things are.
08/03/2020 4:31 PM
Sslee Agree with philip.
Wonder which bank lend money to sapura energy and insist ceo pay by hundred of million?
08/03/2020 4:49 PM
i3lurker you did not manage to get the solution?

coz the ceo owe money to the bank for how much?

Posted by Sslee > Mar 8, 2020 4:49 PM | Report Abuse
Agree with philip.
Wonder which bank lend money to sapura energy and insist ceo pay by hundred of million?
08/03/2020 5:02 PM
Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥ Hallmarks of Success for Banks


What should investors look for when investing in banks and other financiers?

Because their entire business - their strengths and their opportunities - is built on risk, it's a good idea to focus on conservatively managed institutions that consistently deliver solid - but not knockout - profits. Here's a list of some major metrics to consider:

1. Strong Capital Base
2. Return on Equity and Return on Assets
3. Efficiency Ratios
4. Net Interest Margins
5. Strong Revenues
6. Price-to-Book

These metrics should serve as a starting point for seeking out quality bank stocks.

Overall, we think the best defense for investors who want to pick their own financial services stocks is patience and a healthy sense of skepticism.

http://myinvestingnotes.blogspot.com/2009/06/hallmarks-of-success-for-banks.html

Related posts:
Hallmarks of Success for Banks
Hallmarks of Success for Banks: Strong Capital Base
Hallmarks of Success for Banks: ROE and ROA
Hallmarks of Success for Banks: Efficiency Ratios
Hallmarks of Success for Banks: Net Interest Margins
Hallmarks of Success for Banks: Strong Revenues
Hallmarks of Success for Banks: Price-to-Book
08/03/2020 5:04 PM
Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥ Hallmarks of Success for Banks


What should investors look for when investing in banks and other financiers?

Because their entire business - their strengths and their opportunities - is built on risk, it's a good idea to focus on conservatively managed institutions that consistently deliver solid - but not knockout - profits. Here's a list of some major metrics to consider:

1. Strong Capital Base
2. Return on Equity and Return on Assets
3. Efficiency Ratios
4. Net Interest Margins
5. Strong Revenues
6. Price-to-Book

These metrics should serve as a starting point for seeking out quality bank stocks.

Overall, we think the best defense for investors who want to pick their own financial services stocks is patience and a healthy sense of skepticism.

http://myinvestingnotes.blogspot.com/2009/06/hallmarks-of-success-for-banks.html

Related posts:
Hallmarks of Success for Banks
Hallmarks of Success for Banks: Strong Capital Base
Hallmarks of Success for Banks: ROE and ROA
Hallmarks of Success for Banks: Efficiency Ratios
Hallmarks of Success for Banks: Net Interest Margins
Hallmarks of Success for Banks: Strong Revenues
Hallmarks of Success for Banks: Price-to-Book
08/03/2020 5:06 PM
Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥ Hallmarks of Success for Banks:

1. A strong capital base is the number one issue to consider before investing in a lender. The investors can look at several metrics. The simplest is the equity-to-assets ratio; the higher, the better.

2. ROE & ROA: Besides looking for a consistent mid- to high-teen ROE, it is good to see a high level of ROA as well. For banks, a top ROA would be in the 1.2% to 1.4% range.

3. Look for banks with low efficiency ratios as evidence that costs are being kept in check. Many good banks have efficiency ratios under 55% (lower is better).

4. Net interest margins measure lending profitability. There is a wide variety of net interest margins, depending on the type of lending a bank engages in. Most banks' margins fall into the 3% - 4% range. Track margins over time to get a feel for the trend.

5. Above-average revenue growth: Historically, many of the best performing bank investments have been those that have proven capable of above-average revenue growth. Some of the most successful banks have been able to cross-sell new services, which adds to fee income, or pay a slightly lower rate on deposits and charge a slightly higher rate on loans.

6. Book value is a good proxy for the value of a banking stock. A solid bank trading at less than 2x book value is often worth a closer look. Seldom do banks trade for less than book, but if they do, the bank's assets could be distressed.




Because the entire business of banks - their strengths and their opportunities - is built on risk, it's a good idea to focus on conservatively managed institutions that consistently deliver solid - but not knockout - profits.

Learn the businesses over time. Get a feel for,
- the kind of lending they do,
- the way that risk is managed,
- the quality of management, and
- the amount of equity capital the bank holds.
08/03/2020 5:23 PM
Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥ Comparing PBB and DBS


1. Strong Capital Base
PBB
Equity 44.7b / Asset 432.8b = 10.33%

DBS
Equity 51.8 b / 578.9b = 8.95%



2. Return on Equity and Return on Assets
PBB
ROE 12.64% (consistent & trending downwards)
ROA 1.31% (consistent & trending downwards)

DBS
ROE 13.3% (not consistent, highest so far, usually less than 12%)
ROA 1.17% (between 0.77% to 1.17%)



3. Efficiency Ratios
PBB
34.4% (The best among the banks)

DBS
43.03%



4. Net Interest Margins
PBB: Net Interest Margin ?
DBS: Net Interest Margin 1.89%

(in lieu of NIM)
PBB
Operating margin 34.24%
Net Margin 26.65%

DBS
Operating margin 36.05%
Net Margin 30.39%



5. Strong Revenues
PBB
Income Growth CAGR 5.28%

DBS
Income Growth CAGR 7.95%



6. Price-to-Book
PBB: 1.73
DBS: 1.35




PE (ttm)
PBB: 12.44
DBS: 5.45
08/03/2020 5:55 PM
Philip ( what you can learn from RJ MITTE ) You forgot gross loans impairment.

Pbb 0.49%
Dbs 1.5%
08/03/2020 5:56 PM
Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥ In the realm of lending business, managing risks is most important, especially credit risk.

A bank can grow its business very fast by lending excessively and poorly.

A conservatively managed bank, growing revenues slowly, with high quality assets, managing its costs well and well capitalized will do well over the long run.




I will focus on ROA for these 2 banks:

Return on Equity and Return on Assets
PBB
ROE 12.64% (consistent & trending downwards)
ROA 1.31% (consistent & trending downwards, ranging 1.31% t 1.54%_)

DBS
ROE 13.3% (not consistent, highest so far, usually less than 12%)
ROA 1.17% (between 0.77% to 1.17%)

Banking assets are mainly financial assets and the single data ROA says a lot about how well the bank is generating returns from its assets. The ROA of PBB is consistently higher than DBS every year, and though the ROA is trending downwards for PBB, its ROA is also less volatile than DBS.
08/03/2020 6:02 PM
Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥ >>>
Philip ( 2.3% fatality rate, 80% recovery rate age 10-40) You forgot gross loans impairment.

Pbb 0.49%
Dbs 1.5%
08/03/2020 5:56 PM

>>>


I was too lazy to look it up. It will be reflected in the NIM. Thanks/
08/03/2020 6:03 PM
Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥ A case study in point. My friend was invested in CIMB and I, PBB.

For many years, during the tenure of Nazir Razak, CIMB grew very fast. You can always grow a bank very fast by taking more risks and giving out loans with less stringent conditions. Its share price grew fast and PBB was very much a laggard a decade or more ago. However, over the long run, today, PBB has leaped ahead of CIMB. I will go for a bank that is conservatively managed for the long run. It is better to grow richer slowly than to risk what you already have to grow fast. If you are already rich, it is crazy to take these risks. If you are not already rich, you have to be even more smart and careful!
08/03/2020 6:07 PM
Choivo Capital This should be reflected in ROA?

Would be great if i could get the data though. Next time maybe.

===
Posted by Philip ( 2.3% fatality rate, 80% recovery rate age 10-40) > Mar 8, 2020 5:56 PM | Report Abuse

You forgot gross loans impairment.

Pbb 0.49%
Dbs 1.5%
09/03/2020 3:33 PM


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