Sunday, November 17, 2013

Analysis of Maybank Part I: Business Performance

This is a guest article and the opinion is strictly from the author.


I love the banking sector as long-term success really hinges on management’s ability to both effectively allocate funds to generate a decent return as well as manage risks prudently. In this series, I will be analysing Maybank to see if it would make a good long-term investment. Part I of this series will cover Maybank’s business performance while part II will look into Maybank’s risk exposures and valuation. Is Maybank the addictive nasi lemak kukus that people line up 20 minutes for or the 2-day old basi nasi lemak? Let’s find out.

Maybank achieved returns on average assets (ROA) and returns on average equity (ROE) of 1.23% and 14.11% respectively for the 6 months ended June 30, 2013 as compared to Public Bank which achieved ROA and ROE of 1.42% and 20.95% respectively for the same period. Maybank will be benchmarked against Public Bank as Teh Hong Piow just has the secret recipe for making an awesome bank. There are 2 main reasons why I think Public Bank has a higher ROE than Maybank:
1)     Public Bank is more financially leveraged than Maybank as evidenced by its lower capital ratios. As at June 30, 2013, Publick Bank’s tier 1 and total capital ratios was at 10.823% and 13.196% respectively while Maybank’s was at 12.152% and 14.763%  respectively. While higher financial leverage may result in higher ROE, it can also make the company more exposed to insolvency risk.

2) Public Bank has a significantly lower operating cost structure than Maybank. Public Bank had an efficiency ratio of 0.42 while Maybank had an efficiency ratio of 0.58 for the 6 months ended June 30, 2013. The efficiency ratio can be thought of as the number of cents in operating expenses incurred to earn each Ringgit (before taxes). In Public Bank’s case, it has to spend around RM 0.42 cents in operating expenses to earn RM 1. I heard rumours of how Public Bank has the traditional Chinese businessman kiam siap (penny pinching) style of management which is really awesome if you’re a shareholder. I know that my main man Warren Buffett digs a culture of frugality, especially in a commoditized business such as banking.

Maybank’s net interest margin is line with that of Public Bank. Public Bank had a net interest margin of 2.02% while Maybank had a net interest margin of 2.01% for the 6 months ended June 30, 2013. While Public Bank earns a higher yield on its loan portfolio and investments, Maybank has a lower cost of funds.  Maybank’s cost of funds was 1.47% while Public Bank’s cost of funds was 2.19% for the 6 months ended June 30, 2013. Maybank’s and Public Bank’s yield on average earning assets was 3.35% and 4.11% respectively for the 6 months ended June 30, 2013. All said and done, I prefer Maybank’ position as a lower cost of funds is a straightforward advantage while a higher yield could result in a higher charge-off rate. I will look into the charge-off rates of both banks in part II of this series as it relates to their ability to manage credit risk.

Maybank has done well in terms of growing its deposit base. Maybank experienced customer deposit growth of 7.30% over the 6 month period ended June 30, 2013. Maybank also grew customer deposits at a compounded annual rate of 11.28% for the 6-year period of 2007-2012. Deposits are a much more stable source of funds to expand the loan and/or securities portfolios. Banks that rely heavily on debt securities to fund their operations face the risk of not being able to meet their obligations during tough periods when liquidity dries up in the money and capital markets. We’ll look at Maybank’s liquidity risk in part II of this series.

While not great, Maybank’s ROE of 14.11% is still respectable. Charlie Munger (Warren Buffett’s badass partner) once said: Over the long term, it's hard for a stock to earn a much better return that the business which underlies it earns. If the business earns six percent on capital over forty years and you hold it for that forty years, you're not going to make much different than a six percent return - even if you originally buy it at a huge discount. Conversely, if a business earns eighteen percent on capital over twenty or thirty years, even if you pay an expensive looking price, you'll end up with one hell of a result.” If Maybank is able to sustain a ROE of 14.11% over the long-term, I think an investor would do very well holding on to the stock.

If we go back to the nasi lemak metaphor, we can establish that both Maybank and Public Bank are decent tasting (Public Bank tastes better but not by a huge margin). Not worth lining up in the rain for, but definitely something I won’t mind eating once every week. However, just because something tastes alright doesn’t mean it won’t give you the runs, you need to make sure the ingredients used are not of inferior quality. Join me in part II of this series where I will look into the risk exposures of Maybank to find out if the stock is a sound long-term investment. Thank you for reading and I hope you can find the time to pay the Greedy Dragon Investment blog a visit. Take care.

About me: Hi, my name is Justin Teo and I run the Greedy Dragon Investment blog which discusses my stock picks, opinions on the business world and value investing principles. I passed the level 1 CFA exam and graduated from Monash with a degree in banking mid this year. I may be young and do not have any professional experience, but I’ve been investing for a few years now and I think I’m pretty good at analysing companies. But don’t take my word for it, judge me by my analysis. I’m currently willingly unemployed as I plan to work on my project portfolio for track record purposes and just chill for the rest of the year.   
Disclaimer: I’m not encouraging anyone to follow my opinions. I’m not a professional wealth manager. I may make errors in my calculations and analysis. I may choose not to follow conventional ways of calculating certain figures and they may differ significantly from the actual figures you may get using conventional formulas. Whatever investment decisions you make should be based on your own independent judgement. I will not be responsible for any of your losses.    

Side note:  Some if not all of the figures in this article are calculated by myself and may differ from the actual figures that you may get using conventional formulas. Please let me know if you’re interested in how I calculate any of the figures in this article.

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