Sunday, October 11, 2015

Analysis of Maybank

“But then there was fire, and with fire came disparity. Heat and cold, life and death, and of course light and dark. Then, from the dark, they came and found the souls of lords within the flame." –Taken from the opening of Dark Souls. Why? Because I think the game’s fucking awesome.

Please read the disclaimer here: Enjoy the article, bitches!

Hey guys, how have you been? I won’t blame you if you thought that I offed myself by downing a bottle of sleeping pills or something, seeing how stocks are getting killed recently. I won’t lie, it wasn’t fun watching some of my stocks drop with seemingly no end in sight. But I just kept reminding myself that a crisis is the best time to set myself up for some real money in the future. So, I added some new positions to my portfolio and played some video games to take my mind off the day to day fluctuations of my portfolio. That’s the main reason why I haven’t been writing new articles lately, I didn’t want to think more about investments than I had to in this depressing period. The markets have been rebounding recently though, so hopefully we’re seeing the light at the end of the tunnel as I’m running out of cash to put to fucking work. Coconut caramel sundae is also available at McDonald’s (in Malaysia anyway), so that’s another bright spot. Now that we’ve got the small talk out of the way, let’s get down to business. I recently took a stake in Maybank. The bank is based in Malaysia and is listed on the Bursa Malaysia under the stock code 1155. While this stock might not necessarily become a ten-bagger in the near future, it’s a solid company with a reasonable valuation. According to Bloomberg, Maybank has a price/earnings ratio of 11.72 based on last Friday’s closing price of Ringgit Malaysia 8.6 per share. Based on last Friday’s closing price and dividends paid/declared in the past 12 months, Maybank would have an attractive dividend yield of 6.63%.

In the first half of 2015, Maybank generated a return on equity of 12.1% which is alright. The group’s capital ratios indicate that the group is in a healthy financial position. As at June 30, 2015, the group had a common equity tier 1 (CET 1) capital ratio of 11.48% (Maybank assumed an 80% reinvestment rate under its dividend reinvestment program when calculating this capital ratio). This gives the group a significant cushion to absorb losses. According to the capital adequacy framework issued by the Central Bank of Malaysia on 28 November 2012, banks are required to maintain a minimum CET 1 capital ratio of 4.5%.

The bank was growing at a decent pace in the past year. As at June 30, 2015, Maybank’s Malaysia and Singapore divisions experienced year-on-year deposits growth of 7.6% and 11.6% respectively (the growth in the Singapore division’s deposits was in SGD terms). Deposits with the Malaysia and Singapore divisions accounted for 63% and 24% respectively of Maybank’s total deposits. Maybank experienced annualized year-to-date (YTD) growth in its Malaysian and Singaporean deposits of 5.1% and -2.9% respectively. The group’s total deposits annualized YTD growth was at 2.5% (if exchange rates are normalized). I think that investors should monitor the group’s deposits growth in the next few quarters to see if the slower growth rate persists. After all, one or two quarters of slower deposits growth doesn’t really tell us much. It’s the long-term that matters.    

As at June 30, 2015, Maybank’s gross impaired loans stood at 1.56% of total loans. I’m not really worried about the group’s impaired loans at current levels. However, I believe that it’s a useful exercise to think of a pretty negative scenario and evaluate whether or not the group can survive in that scenario. I personally don’t think that the following scenario is likely to happen. But what I’ve learned from some of my earlier investments in the natural resource space, which lost me a fuck load of money, is that it pays to be pessimistic. Anyway, here’s the scenario:

Maybank’s gross impaired loans shoot up by another 5% over the next 12 months. Let’s also say that the group’s provisions for loan losses would come up to 70% of the value of the new impaired loans. This would mean that the group would have to absorb losses equal to 3.5% of its loan book or 2.71% of its average interest earning assets. The group had a net interest margin of 2.28% in the first half of 2015. The group’s annualized overhead expenses as a percentage of average interest earning assets was 0.89% for the first half of 2015. I calculated the overhead expense ratio by first deducting fee income and overhead expenses related to Islamic banking operations from the reported overhead expense; I then divide that figure by the average interest earning assets and annualize the results. While the group’s 1-year net interest income falls short of covering the provisions for loan losses in this negative scenario (especially after taking into account overhead expenses), Maybank’s significant capital buffer should be able to absorb the shortfall without any problems.  

Well, that does it for my analysis of Maybank. I hope you guys have a healthy amount of cash on hand and are upgrading the quality of your portfolio when you find the opportunities to do so.  Take care and stay rational.