LAST week, Public Bank Bhd overtook Malayan Banking Bhd (Maybank) in market capitalisation as the divergence between their share prices widened. This scenario was last seen during the 2008/09 global financial crisis.
This growing difference between Public Bank and Maybank started
10 years ago, before GFC, when investors became more concerned about the asset quality of banks amid an economic downturn.
From April 2008 to April 2009, the market cap of Public Bank exceeded that of Maybank on and off.
As at last Friday, Public Bank was still winning — by a nose. Its share price closed at RM19.82, giving it a market cap of RM76.54 billion, which surpassed the RM75.07 billion market cap of Maybank, whose share price closed at RM7.50.
“Where banks are concerned, one of the key issues for investors is asset quality in a weak economic environment. Public Bank has stood out with its ability to maintain its solid asset quality and report earnings growth despite a challenging business climate for banks,” UOB Asset Management Ltd executive director and CEO Lim Suet Ling tells The Edge in an email.
Questions were raised about the asset quality of the local banking industry recently after Singapore’s oilfield service provider Swiber Holdings Ltd filed for liquidation, and it was reported that Maybank had a loan exposure of about RM5.1 billion, or 1.2% of its total loans, to the oil and gas as well as related sectors in Singapore.
Lim notes that Public Bank’s premium valuation can also be justified by its superior profitability ratios. For example, its return on equity (ROE) of 17.51% is among the highest in the industry. By comparison, Maybank’s ROE is 10.63%.
“Public Bank’s profit growth may be marginal but its exposure to the O&G sector is less than Maybank’s,” observes Phillip Capital Management Sdn Bhd chief investment officer Ang Kok Heng.
He says Public Bank is technically stronger than Maybank because investors have more confidence in it, although the latter’s valuation and price-earnings ratio (PER) are more attractive and dividend yield is higher.
Maybank, the country’s biggest bank, is trading at 1.2 times price-to-book value (PBV) — below its five-year historical average of 1.7 times — while Public Bank is trading at 2.36 times.
Maybank is also trading at a more favourable PER of 11.82 times compared with Public Bank’s 14.79 times while its dividend yield has risen to 6.67% while Public Bank’s has dropped to 2.93% because of a rally in its shares since the beginning of the year.
Nonetheless, these ratios are not the key determinants for investors looking for certainty and earnings visibility. A fund manager with a foreign fund house says loan growth and net interest margin are more important factors than, say, dividend yield.
“You don’t want to buy a stock with only yield but no growth because, eventually, if the bank’s business cannot grow, earnings will come down and yield will be affected as well,” he tells The Edge over the phone.
In the first half ended June 30, 2016, Maybank’s net profit fell 21.26% to RM2.59 billion, although its revenue grew 22% to RM22.12 billion. The earnings contraction was due to higher provisions for impairment losses on loans, advances, financing and other debts, overhead expenses and other lower operating income.
Conversely, Public Bank managed to grow its net profit — albeit a marginal 4.97% to RM2.49 billion on revenue of RM10 billion — in an increasingly competitive operating environment. It said the group’s profit growth was driven by continued healthy loan growth and sustained strong asset quality.
In the present gloomy business climate, fund managers have their reservations about Maybank at its current share price level.
“Public Bank has shown its ability to deliver above-industry profitability while maintaining its strong asset quality. We expect this trend to continue in the foreseeable future,” says UOB’s Lim.
All said and done, given Public Bank’s firm fundamentals, many may hold on to the stock but few may buy it at its current valuation.
As Maybank’s recent share price performance was hampered by its disclosure of increased provisions, especially for the energy sector, she opines that investors will need to see a stabilisation or improvement in asset quality before viewing it positively.
UOB Kay Hian Research analyst Keith Wee has a target price of RM7.90 for Maybank (5% upside from current levels) and RM22 for Public Bank (11% upside from current levels). He derived Public Bank’s target price from an ROE of 14.8% and FY2017 PBV of 2.4 times.
He opines that Public Bank’s valuation premium is sustainable because of its robust asset quality, above-industry loan growth and good position to transition into IFRS9, an International Financial Reporting Standard promulgated by the International Accounting Standards Board.
According to him, Maybank’s regulatory reserves only account for 10% of total current provisions on its balance sheet compared with Public Bank’s 125%.
“There could be some short-term election play on Maybank but the banking group’s provisions will remain elevated for the rest of the year. This is because asset quality may have yet to bottom out and the group will need to build up its regulatory reserve buffers ahead of IFRS9 implementation,” he says.
Although Maybank’s share price has come off its peak, Wee does not view it as a good bargain yet. It is fairly valued at an ROE of 9% and PBV of 1.15 times.
This may also explain why fund managers such as Pheim Asset Management chief investment officer James Lau and Areca Capital Sdn Bhd CEO Danny Wong prefer to wait for a lower valuation before buying Maybank. They believe its valuation has yet to be fully priced for reversal in the credit cycle.
Other analysts, however, see more value in Maybank, especially as the counter has fallen below the target price of most research houses and there is a likelihood of a potential write-back for the bank.
Maybank’s shares have fallen 18% from a peak of RM9.20 in April.
“A provision for oil and gas does not mean a loan default. We may see a potential write-back in the coming quarters if the oil and gas sector stabilises,” Kenanga Research analyst Ahmad Ramzani tells The Edge.
M&A Securities analyst Azizi Khairudin also points out that Maybank’s exposure to underperforming sectors such as O&G is only 4% of its restructuring and rescheduling (R&R) account.
He reckons that once Maybank restructures its R&R account, things will get better.
MIDF Research’s banking analyst concurs, and sees upside potential for Maybank share price. “At its current level, it might be a good idea to accumulate the stock. The expected dividend yield of 7.5%, among the highest in the industry, would limit any downside risk,” he says.
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