Public Bank Berhad is often touted as the most efficient and profitable bank in Malaysia. It is the second largest bank in Malaysia and the second most valuable company listed on Bursa. It made headlines last year when it skipped its interim dividend for the first time since 2005 in light of the pandemic. Have the fundamentals of Public Bank been affected?
Here are 10 things I learned from the 2021 Public Bank AGM.
1. Net profit declined 11.6% year-on-year to RM4.9 billion in 2020 because of the challenging operating environment. Net interest margin compressed as Bank Negara Malaysia slashed the overnight policy rate by 125 basis points in 2020. A one-off modification loss amounting to RM498 million was incurred due to the COVID-19 relief measures extended to customers including the automatic moratorium. Public Bank continues to support all its needy customers. It will not tighten its credit lending requirements but will continue to lend money to SMEs across all sectors. In 2020, it approved more than RM3.4 billion for over 16,000 SMEs.
Higher loan loss provisions were set aside as preemptive measures due to the COVID-19 impact and is expected to remain elevated in 2021. Dividend per share dropped from 14.6 in 2019 to 13 sen in 2020. Dividend payout ratio stood at 51.8% in 2020 and will remain stable at around 50%.
2. Amid the pandemic, the bank used the low interest rate environment to grow its residential property and hire purchase loans. This was done in in tandem with a home ownership campaign and sales tax exemption on car purchases. Public Bank leads the residential property and hire purchase market share in Malaysia.
3. The bank’s strong growth in its current account and savings account in 2020 was due to the non-repayment of loans during the six-month moratorium and other targeted repayment assistance as well as consumers’ reduced spending during the pandemic. CEO Tan Sri Dato’ Sri Tay Ah Lek does not expect this trend to continue in 2021 because these were one-off events in 2020. He expects the net interest margin to expand by 20 basis points and the credit charge off rate to hover between 20 and 25 basis points in 2021.
4. A number of shareholders were concerned about the directors’ high remunerations. Tay was the second highest-paid CEO among listed companies in Malaysia. In 2020, Tay’s remuneration increased from RM35.6 million in 2019 to RM38.1 million while Tan Sri Dato’ Sri Dr. Teh Hong Piow was paid RM20 million for his advisory role in the company in 2020 (compared to RM40.9 million in 2018).
Chairman Lai Wan explained that the director fees and remunerations commensurate their responsibilities and time commitment on the backdrop of increasing complexity in the business and operations of the company. Tay was one of the pioneer staff in 1966 while Teh is the founder of the business. Both of their invaluable guidance and support have enabled Public Bank to consistently outperform the local banking industry.
5. Tay replied to a shareholder that return on equity is a better and comparable industrial benchmark compared to earnings per share because of the differences in the shareholding structures. He explained that the decreasing ROE in the banking industry in the past few years was due to higher capital conservation to meet regulatory requirements, continuous net interest margin compression, as well as higher cost of compliance and IT security. Prudent fiscal management and disciplined cost management will continue to set the company apart from its competitors.
|2020 Performance||Public Bank||Industrial Average|
|Return on equity||11.2%||6.8%|
|Gross impaired loan ratio||0.4%||1.6%|
|Loan loss coverage ratio||228%||108%|
6. Despite significant investment in IT infrastructure due to accelerating digital adoption and changing customer behaviours, Public Bank expects the cost-to-income ratio to remain stable at below 35% in 2021. Digital banking transactions rose sharply during the lockdown. Tay acknowledges that Public Bank will continue to revamp its website and roll out a new mobile banking app to provide a better user experience. In my opinion, its website and app are not as user-friendly as its peers like Maybank and CIMB.
Public Bank’s domestic branches in Malaysia will remain relevant as the network is used to expand its business. The management also considers its existing banking licence to be sufficient to undertake any digital banking activities and will not pursue for a digital banking licence.
7. The company does not intend to conduct any mergers and acquisitions, and will instead rely on organic growth to expand locally and abroad. It will deepen its regional presence in Sri Lanka, Hong Kong, Cambodia, and Vietnam. It aims to open six new branches in Vietnam in 2021 in view of the robust economy and increasing business opportunities. Its headcount increased year-on-year in 2020 in tandem with the expansion of its overseas branch network. Citibank’s exit of the consumer banking business in Malaysia also presents an opportunity for Public Bank to further grow its high-net-worth retail segment and gain market share.
8. Public Bank’s unit trust management company, Public Mutual, is a major contributor of the group’s non-interest income. In 2020, it posted a 10.5% year-on-year profit growth. It is the leading private unit trust company with 33.4% retail market share. As of 2020, its total assets under management stood at RM100.3 billion.
9. Despite the growing popularity of e-wallets, Tay sees opportunities in the card business as customers still prefer the ‘buy now, pay later’ concept. Digital and online purchases in post-pandemic era will further drive the card business.
10. It is worth noting Public Bank’s return grew at a compound annual growth rate (CAGR) of 5.2% in the past five years while the FBM KLCI dropped by 3.9% over the same period. The company’s long-term performance is much more impressive. If an investor bought 1,000 shares in Public Bank when it was listed in 1967 and subsequently subscribed all rights issues, he would have amassed 744,690 shares that are worth RM3.1 million and earned RM1.5 million in dividends. A shareholder pointed out that Public Bank had grown at a CAGR of 19% over the past 53 years.
The fifth perspective
Public Bank still managed to deliver a steady performance and sustained its profitability in 2020 despite the ongoing pandemic. Its short-term future will be fraught with uncertain economic environments and the resurgence of COVID-19 cases. Beyond that, the bank should continue to do well as the pandemic eases and the economy recovers.
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