Sunday, December 1, 2013

Maybank Analysis Part II: Risk Exposures

In the first part of this series I looked into Maybank’s profitability. However, profits don’t mean nothing if they’re not accompanied by sound risk management practices. Just ask Citigroup, it made crazy profits when it was all rainbows and butterflies, but destroyed a ton of shareholder value when reality caught up to it. In part 2 of this series, I will look into Maybank’s risk exposures. So grab a cup of coffee and a packet of nasi lemak and let’s get started on them risks.

Credit risk:
Credit risk for a bank mainly relates to the risk of customers defaulting on their loans. We need to look at a bank’s loan write-off rate to tell if it has been managing its credit risk prudently. For the 5-year period of 2008-2012, Maybank had an average loan write-off rate of 0.75%. Public Bank’s average loan write-off rate was 0.34% for the 5-year period of 2008-2012. As at September 30, 2013, Maybank’s ratio of net impaired loans of 1.06% is manageable.

Maybank’s loan write-off rate is acceptable. However, Maybank had a net interest margin of only 2.01% (annualized) for the 6 months ended June 30, 2013. After accounting for the loan write-off rate, Maybank’s asset portfolio would be earning a pretty low rate of return. Sure, if things stay the way it is, Maybank’s asset portfolio should be fine. But what if Malaysia enters a deep recession and loan write-off rates skyrocket? There’s a real possibility that Maybank’s asset portfolio could give back all the profits it made over multiple years. It may be unlikely that Malaysia would enter a deep recession in the foreseeable future, but I only feel comfortable when investing in a company that can handle extremely negative scenarios. To be fair, we can’t pin this on Maybank. It’s the low interest rate environment that contributes to the lacklustre position of Maybank’s asset portfolio.  

Public Bank has been excellent at managing credit risks. The lower loan write-off rates should result in Public Bank being able to build up more profits during the good times and reduce the risk of many years of profits simply being wiped out by loan write-offs during tough times.  Is Public Bank’s asset portfolio great? Hell no! Its net interest margin of 2.02% (annualised) is simply too low to compensate for the risks and still earn a good return over the long-term. But that’s the fault of the low interest rate environment. Some of you may be wondering why I’m kicking up a big fuss over a 0.41% difference in loan write-off rate. Over the long-term, however, it really adds up and it can separate an average bank from a good bank. Just like how adding a slice of cheese to a ramly burger makes something that tastes alright into something awesome.

Liquidity risk:
Maybank has a very solid deposit base. Its loan to customer deposit ratio was 88.24% as at September 30, 2013. Maybank’s loan to customer deposit ratio is low and indicates that it’s in a good position liquidity-wise.

Deposits are generally a more stable source of funds than the debt markets. During tough times, a bank that relies heavily on the debt markets could find itself having trouble raising funds to meet its obligations. Such a bank may be forced to pay very high interest rates to issue new debt securities and may even face insolvency if it can’t raise the necessary funds to meet its obligations.

Maybank also has a lot of cash and investment securities that it can sell to raise liquidity. As at September 30, 2013, Maybank had Ringgit Malaysia (RM) 58.95 billion in cash and RM 107.73 billion in securities. Maybank also has RM 98.63 billion in loans maturing within 1 year. Maybank could survive an extreme scenario where 20% of customer deposits and 70% of deposits from financial institutions are suddenly withdrawn within 1 year as that would only add up to RM 105 billion. On top of surviving such an extreme scenario, Maybank would still be able to cover the sum of RM 14.94 billion in other liabilities and borrowings that mature in 1 year. Overall, I would say that Maybank has very low liquidity risk.

Side note: In investing, it’s good to be paranoid and examine the company’s ability to survive in extremely negative scenarios. Think of risks as lego men lurking around corners, waiting to rob you of your investment capital. That way you would be more careful when assessing risks.

Interest rate risk:
Interest rate risk relates to the risk that the bank’s profitability may be impaired as a result of adverse movements in interest rates. When interest rates rise and interest-bearing liabilities mature or adjust faster than interest-earning assets, profits could suffer for a while as cost of funds might increase more than interest earned on loans. When interest rates fall and interest-earning assets mature or adjust faster than interest-bearing liabilities, profits could suffer for a while as interest earned on loans might fall more than cost of funds.

I think Maybank shouldn’t be in much trouble whichever way interest rates move as its loan portfolio seems to have the flexibility to adjust to changes in interest rates.  As at September 30, 2013, 66.70% of Maybank’s loans are variable rate loans. 29% of Maybank’s total loans are set to mature within one year.

Solvency risk:
Solvency risk relates to the risk of losses causing the bank’s capital ratios to fall below the minimum requirement. This could cause the bank to go bankrupt or be forced to raise additional capital at the expense of wiping out existing shareholders.

Maybank has pretty strong capital ratios. As at September 30, 2013, Maybank has CET 1 capital ratio, tier 1 capital ratio and total capital ratio of 10.734%, 12.585% and 15.203% respectively. The minimum capital adequacy requirements that will take effect on January 1, 2015 is 4.5%, 6.0% and 8.0% for CET 1 capital ratio, tier 1 capital ratio and total capital ratio respectively. Even the CET 1 capital ratio which has the smallest buffer is 6.234% above the minimum requirement. Unless Malaysia experience some severe recession, Maybank should have enough capital to absorb losses and remain as one of Malaysia’s most stable banks.

I think Maybank has managed most of its risks well and should be safe as a long-term investment if bought at a reasonable price unless something extremely negative happens like a deep recession, nasi lemak getting banned or investors start taking stock tips from sex bloggers. I don’t really like Maybank’s asset portfolio as there’s a risk that it could deliver underwhelming returns over the long-term. However, if you include Maybank’s other income sources, I guess it earns decent returns on capital.

This concludes the series, and I just want to say that it was really awesome writing for intellecpoint. I hope you enjoyed this series and that you can find the time to visit my blog every now and then. Thank you for reading and may you always sustain good returns on your portfolio. 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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