Sunday, December 29, 2013

Valuing Public Bank, Malaysia’s best bank

Please read the disclaimer here:http://greedydragoninvestment.blogspot.com/p/about-greedy-dragon.html. Enjoy the article, bitches!


Many investors regard Public Bank as the best performing bank in Malaysia, a blue chip that everyone should have in their portfolio. Public Bank is listed on the Bursa Malaysia with the stock code 1295. The company is currently trading at Ringgit Malaysia (RM) 19.00 per share (approximately USD 5.78).  Looking at Public Bank’s track record, I can’t help but agree that the company is as awesome as having a Häagen-Dazs date with a hot girl on a hot day. In the 5-year period of 2008-2012, Public Bank achieved net return on equity of between 24.5%-30.4%. The company defines net return on equity as “equity attributable to equity holders of the Bank, adjusted for dividend declared subsequent to year end.”

 

However, a good company doesn’t automatically translate into a good investment, the price you pay for the stock must also be reasonable.  Instead of using the price-to-book ratio many analysts use to gauge the value of banks, I’m going to calculate Public Bank’s true earnings power and discount it to the present. If you’re interested, I will be talking shit about why the price-to-book ratio isn’t the best ratio to tell if a bank is undervalued in my bullshit financial theories series sometime soon. Alright bitches, let’s start valuing this bank!


The following income statement data is taken from Public Bank’s third quarter 2013 report.

For the nine months ended September 30, 2013

                                                                        RM’000

Operating revenue                                          11,345,627
Interest income                                                 8,458,428
Interest expense                                              (4,301,452)
Net interest income                                           4,156,976
Net income from Islamic banking business        633,204
        4,790,180
Net fee and commission income                         941,002
Net gains and losses on financial
instruments                                                        133,613
Other operating income                                     233,048
Net income                                                        6,097,843
Other operating expenses                                (1,873,242)
Operating profit                                                 4,224,601
Allowance for impairment on loans,
advances and financing                                      (260,969)
(Impairment) / writeback of impairment
on other assets                                                      (1,064)
         3,962,568
Share of profit / (loss) after tax of equity
accounted associated companies                          6,130
Profit before tax expense and zakat                  3,968,698
Tax expense and zakat                                       (898,127)
Profit for the period                                           3,070,571

To get to Public Bank’s true earnings, I will adjust allowance for impairment on loans up from RM 260.969 million to RM 545.325 million. The adjusted allowance for impairment on loans is based on Public Bank’s average loan charge-off rate of 0.34% for the 5-year period of 2008-2012. It’s important to use the average charge-off rate over a period that includes some stress instead of a current charge-off rate that’s low. This is to prevent over optimistic estimates of a bank’s earning during the good times when loan charge-off rates are low and girls at least pretend to be interested in what I say. There are also various items that I would like to subtract from profit for the period as I’m not sure of their sustainability. But those items add up to a negligible amount, so I don’t think it’s necessary to adjust for them.

After taking into account the higher adjusted allowance for impairment on loans, my estimate of Public Bank’s true earnings would be RM 2.763 billion or RM 3.684 billion after being annualized. This would result in the company having annualized true earnings per share of RM 1.052.

My required rate of return for Public Bank is 10%. I will assume that Public Bank will grow earnings by 6% over the next 7 years and by 3% after that. I think my assumptions for growth is reasonable as the company managed to grow deposits from customers by a compounded annual rate of 10.15% for the 5-year period of 2008-2012. Growth in deposits from customers remained healthy at 12.32% year-on-year for the quarter ended September 30, 2013. As established earlier, Public Bank’s annualized true earnings per share is RM1.052. Plug these variables into the formula and you will get an intrinsic value of RM 18.3 per share for Public Bank. To be prudent, I will require a margin of safety of 20%. That would mean I can only invest in Public Bank’s stock if it was RM 14.64 or below. Here’s the formula:

RM1.052*1.06*(1- (1.06)7/(1.10)7) = RM 6.36
                    0.1- 0.06

RM1.052*(1.06)7*1.03 =  RM 23.27
   0.1-0.03

RM 6.36 + RM 23.27 = RM 18.3
                   (1.1)7

It’s possible that someone with a deep understanding of the Malaysian banking sector could come up with a higher true earnings figure or higher growth rate for Public Bank than I did. But I don’t think I was overly conservative. I personally won’t invest in Public Bank as I think it’s a bit overvalued and I’m able to find better opportunities out there. However, I can’t really fault people who invest in Public Bank at intrinsic value or even a little bit over intrinsic value as it’s a really good company.



If y’all are interested, I wrote a little about Public Bank’s business performance in a guest post here. Please let me know if you want me to do a write up of Public Bank’s risk management. Thank you for reading. I hope you had an awesome and prosperous 2013! Take care and stay rational!

3 comments:

  1. Public Bank Berhad is especially an unique investment case for me. Despite of the strong fundamental factors, the top risk now is none other than Tan Sri Teh Hong Piow's health.

    Being an ex-PBB guy, I have witnessed the incredible sense of loyalty from the staff, especially the veterans (many beyond retirement age but still working), who showed great commitment and dedication to Public Bank Berhad purely because of their respect and worship towards the founder. I foresee an operational set-back from the "touch wood" day onwards, where mass resignations could happen.

    I don't mean to curse Tan Sri Teh, in fact I have enormous respect to him like all the PBB staff do. I am just looking at it from an actuarial perspective, where he might not survive beyond another decade.

    Such potential negative catalyst put PBB strictly into my watchlist and not buylist, at least for the time being.

    ReplyDelete
    Replies
    1. Yup great companies founded by visionaries have to really focus on succession planning. And usually the person who takes over when the big man finally steps down can't really perform as excellently. It's the case for Steve Jobs and Apple. And I think will probably be the case for Public Bank and Berkshire Hathaway. Although the systems and culture established by Teh Hong Piow could probably ensure that Public Bank remain a very good back after he retires.

      In my opinion, Teh Hong Piow is the best businessman in Malaysia. When I find a job after CNY, Public Bank will certainly be on my list. Too bad my auntie who was head auditor there left and migrated many years ago. So no one to put in a good word for me
      :-(

      Anyway thanks for the comment, happy new year!



      Delete
  2. The set-back that I foresee will definitely be temporary in nature. Bank is about loan book and PBB is having a great one, mortgage borrowers still need to repay their loan when the founder is no longer around.

    Happy new year to you too :)

    ReplyDelete