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.