Malaysia's Public Bank resilient despite tough times

Impact of overnight policy rate cut just a ‘drop in the ocean’ for Malaysia Public Bank.

Malaysia's Public Bank, currently one of the most expensive banks trading at three times book value, is expected to remain relatively unscathed from the impact of the worldwide financial crisis and interest rate cuts.

“We are confident that their management is ‘on-the-ball’ and that its growth path is on track despite visibly tougher operating conditions,’’ said ECM Libra Investment Research acting head of research Ching Weng Jin.

He estimated that the impact from the recent 25 basis-point cut in overnight policy rate (OPR), from which base lending rate is calculated, was a “drop in the ocean’’ for Public Bank. This is despite the fact that a floor has been set for deposit rates.

“On a net basis, it could be 1% to 2% of forecast net profit for next year (consensus for this year is RM2.4bil),’’ he said. This takes into account income earned from about RM300mil that will be released from the recent reduction in statutory reserve requirements (SRR) that banks place with the central bank.

On an immediate basis, this money can be lent to the interbank market and earn income. In the current environment, banks will assess carefully how they are going to spend this money.

Public Bank managing director Tan Sri Tay Ah Lek told StarBiz in an e-mail reply: “The reduction in the SRR mitigates the impact of the reduction in the OPR on the bank’s net interest income. The net impact of the cut in OPR and the reduction in the SRR is at the low end of the analysts’ estimates, which are quite marginal.”

“Loan loss provisioning at 160% (compared with the banking industry average of 83%) is prudent,’’ said Ching. “Asset quality is the best in the industry, with net non-performing loans at 0.9% against the industry’s 2.4%.’’

Loans-deposit ratio, at 75%, is fairly good. Banks with lower loans-deposit ratio – the amount of loans divided by the amount of deposits – will be in a better position to capitalise on any further drop in OPR, but the 75% ratio is definitely more manageable than the 90% ratio during the 1997 Asian financial crisis, which gave banks hardly any room to manoeuvre.

The focus would be on core segments such as retail banking and financing services, complemented by corporate banking services, including Islamic banking, said Tay.

“In the lending business, the group will continue to promote both consumer financing (home mortgages, hire-purchase and personal financing) and retail commercial lending to small and medium enterprises (SMEs). On deposit taking, the group will continue to promote retail and wholesale deposits to maintain its healthy loans-to-deposit ratio. Foreign currency deposits and structured deposit products will also be promoted.

“Efforts to expand the fee-based activities such as sales of unit trust funds, bancassurance and general insurance products, remittance services, trade finance and treasury activities will be accelerated,’’ Tay said.

“Based on earnings outlook for this year, Public Bank is in a position to deliver the dividend yield (of 6% to 7%) as expected by analysts.’’

Ching said the bank’s exposure to SMEs was not too much of a concern as close to 80% of it was to importers of consumer goods which fed the still vibrant domestic services sector.