Banking - the advantage is in home ground

by **Cals** Mon 04 Aug 2014, 02:00

Published: Saturday August 2, 2014 MYT 12:00:00 AM
Updated: Sunday August 3, 2014 MYT 11:58:01 AM
[size=40]Banking - the advantage is in home ground[/size]
BY M. SHANMUGAM
TRADING at a price-to-book value of Public Bank Bhd of 3.2 times, Public Bank is easily the most expensive financial institutions in the region, if not the world.
There are reasons for this. Its cost-to-income ratio at 31.7% as of end-March this year is the lowest in the region and earnings are relatively steady because its loans are largely for mortgages.
It is less reliant on income from investment banking that generates fee and commission based advisory work.
For the six-month period ended June 30 this year, its net interest income, which is a measure of its income from mortgage loans, stands at RM1.42bil. It over-shadows its net non-interest income of RM347mil.

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The proportion of interest income, which is considered steady, is about 80% compared with the non-interest income that is subject to the vagaries of the capital markets.
And Public Bank’s business is 93.6% concentrated in Malaysia where the default rate is low, unlike in Indonesia.
The latest quarterly results of PT Bank Niaga that is under the CIMB Group Bhd and Bank Internasional Indonesia (BII) that belongs to Maybank shows that non-performing loans are ticking up in that country.
Indonesia, a country with 230 million people and growing, is an important market for any financial institution wanting to stamp their authority in Asean. As best described by CIMB Group chief executive Datuk Seri Nazir Razak, the Asean Economic Community (AEC) cannot be taken seriously without Indonesia.
Both Maybank and CIMB have exposure to Indonesia. While it gives them a presence in a growing market, there are also inherent risk. The latest quarterly results of the Indonesian banks under CIMB and Maybank showed that both registered lower profits, higher non-performing loans and the outlook in earnings as hazy due to the rupiah’s volatility.
A banking analyst agrees that Indonesia provides the growth market. “But at the same time the earnings are also volatile. An ideal situation is to have a bank that has a mixture of both Public Bank and CIMB,” says the analyst.
The prospective merger between CIMB, RHB Capital Bhd and Malaysia Building Society Bhd (MBSB) has the potential to bring about a bank with some qualities prevalent in Public Bank. Towards this end, the three banks are now in the midst of negotiations.
At the moment, CIMB’s loans, advances and financing – the banking assets that drive earnings – are spread between Malaysia and Indonesia.
Close to 60% of its assets are with borrowers based in Malaysia, 20.6% in Indonesia and the rest spread over Singapore, Thailand, China and other countries (see table).

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RHB Capital on the other hand has 90.2% of its loans, advances and financing tied to borrowers in Malaysia. It does not have a presence in Indonesia and has seven branches in Singapore that has 5.7% of its loans, advances and financing assets.
The proposed merged entity would see 72.3% of its loans, advances and financing tied to borrowers from Malaysia and the share to Indonesia would drop to 12.4%.
“The merged entity’s loans, advances and financing to Singapore market would be about 6.6%.
“The portfolio mix would be comparable with the banks in Singapore that have more than 70% of their exposure to borrowers in the island republic and Malaysia. It would not be a high as Public Bank but better than the current situation,” says the banking analyst.
Maybank has a portfolio mix of loans, advances and financing that is largely tied to borrowers in Malaysia and Singapore.
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Close to 84% of its assets are exposed to borrowers from Malaysia and Singapore, two countries where the banking system is relatively well tested, stable and portfolio of borrowers tend not to default on loans.
“Generally banks with a large amount of business in Malaysia and Singapore tend to see steady earnings. There is little currency and asset quality risks,” says the analyst.
In Maybank’s books, as at the end of March this year, the share of loans, advances and financing to Indonesia borrowers through BII is only 8.3%.
This explains why Maybank is less sensitive to what happens in Indonesia compared with CIMB.
Indonesia only contributes to 9% of its earnings while Singapore on other hand is an important market and contributes 20% of Maybank’s earnings.
A banker says that one of the reasons why Public Bank has a low cost-to-income ratio is because it does not have a large investment bank outfit, like CIMB. This is reflected in its low non-interest income portion to the bottom line.
CIMB took over Singapore’s GK Goh Holdings Ltd in 2005 and the Asian unit of Royal Bank of Scotland in 2012 in its quest to become the Goldman Sachs of Asia.
The acquisitions positioned CIMB as the only Asian bank outside Japan with ambitions to be a regional broker and provide corporate advisory. But it came with a cost to it.
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“Investment bank division is a high cost unit within any bank. It is high profile and profits are lumpy. But when times are bad and corporate deals are not coming, the cost be a burden,” says the banking analyst.
CIMB’s ratio between the net interest income and net non-interest income used to be about 60: 40 in previous years. Based on the latest quarterly results, the net non-interest income as a proportion of the total interest and non-interest income has dropped to 34.6%.
As for RHB Capital, the proportion between net interest income and non net-interest income is about 72% to 28%.
The proposed merger between CIMB and RHB would bring down further the portion of non-interest income because of the latter’s small investment banking division.
The contribution from the investment bank, which is lumpy and unstable, would even shrink as the cake of the entire banking system grows.
RHB Group’s founder and a seasoned corporate hand, Tan Sri Chua Ma Yu testifies to the growing asset base of the banking system.
He estimated the size of the banking asset to be about RM450bil in 2000 and says that it is more than RM1.2 trillion now. He attributes it to the North-South Highway that helped grow the economy.
“The banking system more than doubled in asset base since after the completion of the North-South Highway. This is my personal experience. I envisage it to double again after the MRT (Mass Rapid Transit) project,” he tells StarBizWeek.
When that happens, hopefully the proposed merged entity would eventually be less reliant on investment banking and more on mortgage loans, just like Public Bank.