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