Public Bank Tier 1 Capital Concerns
I was reading an article about Public Bank in TheStar on Tuesday. It was titled “OSK: Selldown in Public Bank overdone”.
As I write this post PBBANK is trading at RM7.55, up around 50-60 sen from its recent low.
Is the sell down really overdone?
PBBANK has always traded at a premium to its peers. It trades at around 2.7 times its Shareholders Funds compared to Malaysia’s banking sector average of less than 1.5x.
Regionally banking stocks trade between 0.6 to 2.0x.
Indeed PBB is one of the most expensive banking stocks around (perhaps in the whole world) in terms of Price to Book Value. The article in TheStar highlights Public Bank’s dividend yield and loan growth and briefly touches on Capital Adequacy.
The Capital Adequacy aspect is worth a closer look.
Public Bank’s loan book is considered top quality, but from a capital adequacy point of view its core Capital Adequcy Ratio (CAR) of 7.7% is among the lowest in the region.
Source: CLSA Asia Pacific Markets – Research on Public Bank 9/3/09
Its core Tier 1 ratio stood at 6.5% as at Dec-08. In contrast AMMB has Core Tier 1 of 8.3% and Maybank of 7.8% (post-rights).
Source: UOB Kay Hian – Research Report on Public Bank 6/3/09
What is Tier 1?
In a nutshell Tier 1 comprises of the Net Assets of the bank less Intangibles such as Goodwill and Deferred Tax Assets plus certain Hybrid Securities. Hybrid Securities are semi debt-equity in nature and are classified as Liabilities in the bank’s balance sheet.
So basically Tier 1 is the Net Tangible Assets that are attributable to Shareholders & Hybrid Security Holders.
Source: Public Bank Annual Report, Note 51
Under the Bank Negara’s guidelines, banks are allowed to raise hybrid securities of up to 50% of total Tier 1 capital.
Public hybrid securities currently comprise around 15% of its Tier 1 capital which gives it some room to move.
It looks like Public Bank doesn’t have plans for an equity issue but may consider a further issue of Tier 1 hybrids. According to director Tan Sri Tay Ah Lek:
“The bank continues to assess its capability to support its CAR with various forms of debt and capital securities under Bank Negara’s capital adequacy framework…. in particular, the bank is assessing the market for non-innovative Tier-1 capital instruments which qualify for capital adequacy purposes.”
Tan Sri Tay was also cited as saying that PBB will maintain its “liberal dividend policy”, which provides comfort to some people I guess.
However all things said, the scenario for Public Banks shareholders could be choppy over the next two years.
PBBANK is priced at a premium traditionally because of its superior earnings growth, asset quality, top notch management. But we are in a period of:
- Increasing NPLs
- Slowing loan growth
- A more competitive landscape
- Increasingly competent competitors
No doubt Public Bank is fundamentally sound, but we are going through testing times and it will affect every bank. Public Bank’s expensive valuation makes it vulnerable to the changing market forces.
March 24th, 2009 at 12:34 pm
Well, I will say that the choppy situation should apply to banking sector in general and not just Public Bank.
* Increasing NPLs
* Slowing loan growth
* A more competitive landscape
* Increasingly competent competitors
IMHO, Public Bank’s edge seems to be against the few risks stated above, as it has lowest NPL rate in the sector, high loan quality, and good quality management.
Is this a good time to buy banking stocks? It is subjective but I do think it is a good time to start accumulating. =)
March 24th, 2009 at 4:42 pm
Quite true Jeff. I too believe that you can slowly accumulate. But need to realize that NPLs are just starting to form and by year-end we could be in for a rough ride. If NPL is worst than expected, Public Bank may be forced to raise equity capital to prop up its Tier 1 and CAR. Unemployment is still on the rise globally and the little bull run in Wall Street we witnessed recently could just be a false dawn.
March 28th, 2009 at 10:06 pm
What is core Tier 1 capital compared to Tier 1 capital?
I work in Dubai. Over here Tier 1 capital adequacy ratio (CAR) for bank is 11% with deadline by Jun09. Emirates NBD, largest bank in Duba and one of the largest bank in the region, has a CAR ratio of9.4%.
Does Central Bank has any intention on raising CAR?
March 29th, 2009 at 11:54 pm
Hi,
Latest unofficial info, PBB maybe going private, if so at what price u think? Will shareholders expect a windfall should a buy-back be on the cards?
March 30th, 2009 at 12:49 pm
Boon Pin – Thanks for your insight on the Dubai system, it sounds prudent. In Malaysia, Core Tier 1 excludes Hybrid Securities (eg Unsecured Notes and other qualifying securities which typically rank pari passu with other unsecured liabilities of the Bank and are subordinated to other secured rights in the event of winding up). They may qualify as Tier I Capital in determining the capital adequacy ratios of the Bank, up to a maximum of 15% of Tier I Capital, with any excess qualifying as Tier II Capital. I’m not aware if Bank Negara has any intention to raise CAR, I recall from media reports few months back that they were actually looking to relax the Statutory Reserve Deposit requirements.
Winter – I’m not aware of privatization of PBB. it would be a gigantic effort, not because of the $$$ but because of regulations and public policy, and can only be done by the government (or God of course).