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.
Conclusion:
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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