Public Bank Wins Best Asian Bank Award

At last night's Country Awards for Achievement dinner, we announced Malaysia's Public Bank as the winner of our Best Asian Bank award. Like the other country awards, the achievement refers to the period from June 1, 2009 to May 17, 2010.

"The Best Asian Bank honours the bank that stood out among the best of Asia's top banks," said Lara Wozniak, editor of FinanceAsia. "The selection of the winning bank is a highly quantitative one, with each bank scored on a number of key performance metrics. Public Bank scored the highest of the 11 shortlisted banks."

The Best Asian Bank award is given to the bank that ranks the highest among the 11 banks that have individually won our Best Bank award for each country. We ranked the banks by a series of metrics and also by their scores in Standard & Poor's Bank Fundamental Strength Ratings. The metrics used include: return on assets, return on equity, profit per employee, total assets, percentage of net income derived from fee business, gross NPL ratio, the compound annual growth rate, price-to-book ratio and net interest margin.

The best-ranked bank for each metric got 11 points and the lowest-ranked got 1 point.

We then overlaid this with S&P's Bank Fundamental Strength rating, which measures a bank's strength, and graded them accordingly -- an A rating got the most points and an E rating the least. The S&P rating got a 25% weighting in the overall score.

At the end of this point scoring system, Public Bank emerged as the Best Asian Bank. The 11 shortlisted banks were:

China Construction Bank (China)

HDFC Bank (India), Bank Mandiri (Indonesia),

Public Bank (Malaysia)

Banco de oro Unibank (Philippines)

DBS (Singapore)

Shinhan Bank (South Korea)

Commercial Bank of Ceylon (Sri Lanka)

Chinatrust Commercial Bank (Taiwan)

Kasikornbank (Thailand)

Asia Commercial Bank (Vietnam).

HSBC (which won the Best Bank award for Hong Kong) is excluded on the basis that it is really a global bank.

Public Bank's award was collected by Chong Yam Kiang, an executive director and alternate chief executive, who attended the awards dinner. Earlier in the evening he also accepted the award for Best Malaysian Bank.

My Prediction For The #1 Biz News In 2010 - CIMB Merges With Public Bank

OK, remember you heard it first here, here during the last few days of 2009. So when it pans out, remember me ok ... We still have ten banks in Malaysia, and that is still way too many banks, we should really just have 5, probably we will end up with 7. The markets are buzzed with Hong Leong Bank thinking of snatching EON Bank and/or Affin Bank. Well, the latter two should not be around by end of 2010, and that's pretty much a given. So called anchor banks that have no capacity or resources to be competitive in an open environment will have to sell.

(click on image to enlarge for viewing)

My best prediction and also the biggest shebang for 2010 is that CIMB Bank will merge with Public Bank. If you read the roadmaps closely and do the usual deduction analysis, its very likely going to happen. It makes sense on so many levels. Maybe Goldman Sachs should hire me to close this deal with these two banks (send me an email: malaysiafinance@gmail.com).

A couple of months ago, there were rumours that the two Chinese banks, namely Public Bank and Hong Leong Bank, were going to merge. It is unlikely to pan out as Public Bank is "too important" an asset, coupled with a possibility that there could be regulatory or political resistance, and that there appears to be a more viable case to go with CIMB. I see the main hurdle to a Public Bank-Hong Leong Bank merger being that Bank Negara would never want the biggest bank (by virtue of the merger) to be controlled by ONE individual. Apparently Hong Leong Bank has also been not so willing to go higher on the pricing front. The replication of businesses are too great as well.

Why CIMB & Public?

1) Fit - It fits into each other's strengths. One is in investment banking and has very decent regional exposure while Public is very commanding in consumer banking. Very good loan-deposit fit.

2) Flagship Entity & Size - The two merged would actually see CIMB-Public becoming possibly the biggest banking group in Southeast Asia, possibly nudging aside DBS Banking Group as well. The importance of size cannot be discounted. The forward thinking Nazir with Khazanah and EPF backing it all the way should see this as a necessary strategic consolidation. Get our best two banks to go and conquer the region. When you have a brood of kids and you are not very rich, pick the smartest kid or the one you like best and that one gets to go to college - CIMB Bank should be the "flagship entity" to plant the country's flag in the region.

3) Teh's Stake - Teh of Public Bank has no seeming successor from his family to take over the shares. When he is no longer around, the controlling stake may be viewed as a negative rather than as a positive. If no family member is keen to follow up, its better to NOT just be a strategic silent shareholder - eventually they may be "guided" to dispose the shares one way or another - why not lay down the strategic future of Public Bank in "safer hands". Its a sure way of protecting and maintaining Teh's legacy in the banking industry.

4) Asset Management - One of the main jewels of Public Bank is Public Mutual, something CIMB has been trying very hard to build/buy with minimal success. Imagine transplanting the Public Mutual exemplary record across the region. This can be turned into a massive fee generating machinery via its regional branches.

5) Public Bank's Capital Constraints - This is something which is not discussed often enough by Public Bank's shareholders. In recent years, tons of money has been paid out in dividends, but of late that has be constrained as PB needs to bolster up its capital adequacy ratio despite being a highly profitable entity. I doubt very much that Teh wants to do a rights issue. Public Bank's Tier 1 capital is at a precarious 8.6% and it needs to meet global standards soon. The Basel Committee is expected to announce several measures to strengthen banking regulations by end 2009. These include (a) raising the quality, consistency and transparency of Tier 1 capital base (with the predominant form to be common shares and retained earnings), (b) introducing a leverage ratio as a supplementary measure to the Basel II framework and (c) implementing a framework for countercyclical capital buffers above the minimum requirement, including constraints on capital distributions. If adopted by Bank Negara, and I don't see why not, Malaysian banks will have less room to raise Tier 1 debt securities and pay generous dividends, resulting in lower ROEs in the longer term. This is what Public Bank is facing as a hurdle for the future.

6) Staff Retention & Culture - I think there is a much better fit with CIMB than with Hong Leong Bank. CIMB pays much better for performers and critical functions, and I sense a possibly higher approval rating by Public Bank's staff if the merger was with CIMB than with any other bank.

7) Playing Devil's Advocate - Can Public Bank go it alone without Teh at the helm in the future? Yes, but that is not the question at hand. The main question is the floating controlling stake. Let's take another tack and imagine a Public-AMMB vehicle, I can see issues with who controls what and the culture is definitely very different. The same goes for Public-RHB but to a lesser extent. One can see that both versions would yield minimal synergies. When you consider CIMB-Public, it crystallises as a beautiful plot, Public's side continues to dominate the consumer banking, throw the asset management stuff (Principal) into Public Mutual, consolidate Public Bank's overseas holdings under CIMB's regional management, leverage on the better loan-deposit ratio for much better margins in various products., etc...

8) Ownership Streamlined - A merger between the two is much easily digestible and acceptable as it won't be controlled by an individual. The merged entity would see Khazanah and EPF being up there as the main shareholders. There would be an even better free float and liquidity and the merged entity would surely rank as one of the more important Asian banking groups by international funds and institutions.

CIMB vs Public Bank (F) Comparisons
a) Tier 1 Capital 12.1% vs 8.6%
b) CY2010F PER 14.1x vs 13.3x
c) PB Value (2010) 2.1x vs 3.2x


Why Now? Why Not In 2009, 2008 or 2011?
Well, we can rule out 2008 owing to the global crisis. In 2009, you cannot really do the deal properly in CIMB's viewpoint because the valuations of CIMB was too low to make it work.

CIMB 3.57bn shares / RM45.8bn
Public Bank 3.53bn shares / RM38.6bn

One would have noted that CIMB outperformed the banks over the last 12 months by a wide margin. Just look at the market cap comparison now. It would have looked very different at the beginning of the year. How can I say something, without having to say it quite so plain and in the face?!!

HowTo Do It?
Back to Hong Leong Bank, it would have been a smaller bank trying to take over a much larger entity. To maintain control, Quek would have had to put in loads of cash to do the deal. In CIMB-Public scenario, you should just do a share swap. A one for one swap would anger CIMB minority shareholders. However, the key is to assuage the Public Bank minority shareholders, hence they deserve some sort of premium. I would propose a 1,000 Public Bank in exchange for 900 CIMB shares deal. That would still be a good premium, and CIMB shareholders would be very pleased to have the strongest consumer bank into their fold. That way, post merger CIMB shares would probably go even higher, thus placating those Public Bank shareholders who have switched to CIMB shares.

Key Issue: The biggest obstacle is not getting enough Public Bank shareholders to agree to do the swap. I have two additional measures to ensure that the PB shareholders will go through with the swap, but that will only need to be revealed if someone hires me to consult.

Valuation wise, CIMB's price-book ratio has increased rapidly over the past 18 months, but it will never be able to match Public Bank's prohibitive 3.2x PB ratio. Everybody should acknowledge that Public Bank deserves the premium from its better metrics in consumer banking, so a 10 for 9 share swap, though seemingly favouring Public Bank shareholders, would have to be the way to proceed to secure the deal.

Post Deal
The new entity would have 6.747bn shares, and assuming the new entity's share price at RM13.00 = RM87.7bn market cap. DBS Group has a market cap of $24.4bn = RM83bn ~ with that kind of boasting rights, you just HAD to do the deal!!!

Khazanah with 27.86% in CIMB earlier, would now have 14.74% in the new entity. EPF with 16.04% in CIMB and 12.8% in Public Bank, would now have 14.52% in the new entity.It would not surprise me if both Khazanah and EPF were to keep buying Public Bank shares in the open market "during the deal" as that would really help facilitate the deal further.

Recent historical banking M&A - Acquirer & Acquiree PBV (x)
Mar‐07 ANZ & AMMB 1.8
Apr‐07 Bank of Tokyo‐Mitsubishi UFJ & BCHB 2.7
Nov‐07 Bank of East Asia & Affin 1.0
Feb‐08 Primus Partners & EON Cap 2.1
May‐08 Abu Dhabi Commercial Bank & RHB Cap 2.2

Average 2.0


p/s photo: Sharon Xu

New York Roadshow By JP Morgan

J.P. Morgan's Malaysia Corporate Access Days

November 5-6 (Thu-Fri)

Grand Hyatt New York, 109 East 42nd Street at Grand Central Terminal, New York

• Roundtable discussions, presentations and Q&A sessions with Malaysian government officials and regulators
• 1x1 meetings with participating Malaysian corporates

Senator Tan Sri Amirsham Abdul Aziz, Chairman - National Economic Advisory Council
Dato' Ooi Sang Kuang, Deputy Governor, Bank Negara Malaysia
Dato' Yusli Mohamed Yusoff, CEO, Bursa Malaysia

Participating Corporates

Air Asia (AIRA MK) - Dato Kamarudin Meranun, Group Deputy CEO

Axiata Group (AXIATA MK) - 1. Dato' Sri Jamaludin Ibrahim, President & Chief Executive Officer / 2. Dato’ Yusof Annuar Yaacob, Group Chief Financial Officer

Bursa Malaysia (BURSA MK) - Puan Nadzirah Abd Rashid, CFO

IJM Corporation (IJM MK) - Datuk Krishnan Tan Boon Seng, Chief Executive Officer & Managing Director

Public Bank (PBK MK) - Mr. Leong Kwok Nyem, Chief Operating Officer

Sime Darby (SIME MK) - 1. Azhar bin Abdul Hamid, EVP, Plantation / 2. Mohamad Hishammudin bin Hamdan, Group Head, Strategy & GBD / 3. Shariman Alwani bin Mohamed Nordin, Gp Head, Value Mgt & IR

S P Setia (SPSB MK) - 1. Ms. Wong Sheue Yann, Head, Corporate Services - Group Corporate Services / 2. Mr. Cheong Heng Leong - Manager, Investor Relations - Group Corporate & Finance Division

YTL Corp Berhad (YTL MK) - Tan Sri Dato' Dr Francis Yeoh, Group Managing Director

p/s photo: Chrissie Chau

The Million Dollar Question .....

It had to happen, and it did when Mr. Ooi asked the question that everyone in the financial markets industry dreaded.


Ooi Beng Hooi has left a new comment on your post "Buy Side Vs Sell Side Analysts":

I fail to understand why the calls made by various analysts are so different.

For example, after released of Public Bank quarterly result, some of the calls made by various analysts:

CIMB: Outperform, target price RM 11.10
AMResearch: Buy, target price RM 10.00
Inter-Pacific: Outperform, target price RM 9.75
Kenanga Research: Buy, target price RM 9.30
OSK: Buy, target price RM 8.60
Mayban Investment Bank: Sell, target price RM 7.60
Credit Suisse: Underperform, target price RM 7.50
UOB KayHian: Hold, target price RM 6.88
Citigroup: Sell, target price RM 5.77

Some have "BUY" calls, some have opposite calls and one have neutral position.

Even though Public Bank is considered a transparent listed company with high disclosure of corporate information compared to others, I am a bit surprised to see such wide range of target price, with the highest one almost double the lowest target price.

How can they be so different?

-------------

Financial markets are like economics, its a lot of bullshitting and a small amount of substance. You put 10 economists in a room to come out with a paper on why and how the current global crisis came about, you will probably get a few people killed and still no conclusion at the end of a week.

Put the same issue to a group of scientists, and they will explore the various theories and categorise them accordingly. They will then set up the various testing hypotheses, hopefully they can result in some for of data, hopefully then they can regress the data into some for of equation, hopefully once they have the equation then they can draw a fucking line on a chart, and make the conclusions from the fucking chart. Gawd save them if they cannot get solid data, gawd help them if the data is all over the place, gawd save them if they can cluster the data into a regressed equation, no equation = no formula = no result, no no equation cannot draw line on chart = fucking hopeless study = watse of time.

The difference is if you give financial markets issues to a group of scientists, they will throw their papers and binders in the air after a few months and conclude that the "truth" is nowhere to be found, that you cannot conclusively determine anything from an empirical type of study or testing. Still, the economists, analysts and experts will continue shouting their views and opinions to each other - because in bull shitting you do not need substance, evidence or credibility.

Put 10 analysts in a room to analyse Public Bank, thats what you get. Its a hopeless profession that happens to pay well. Never has so much pay been given to so many for so little contribution!!! Parents now don't want their children to be doctors or lawyers... go be an analyst or fund manager and make 5x times more than the smartest kid who went to study medicine.

Analysts' views will almost always be different because their assumptions are not the same. Some may assume a NPL of 6% over the next 12 months, some just 4% while others may see it at 11%, and that will work its way into your earnings model and risk assumptions. There are many other important assumptions that one has to make in order to do projections: it could be growth, margins compression, staffing cost, local interest rates in 6 months time, in 18 months time, ..etc.

Then you have to make the more important arguments, which are more 'philosophical' and big picture: has Public Bank gone past the "easy growth" era; can Public Bank translate the "winning strategy" in other countries; what will happen after Teh Hiong Piau; are foreign funds holding too much of Public Bank (which means they can only be selling in the future, not buying more); etc...

I have mentioned this time and time again, look for consistency of results in the analysts and house strategy. Follow those who have argued well in the past, look for those who are focused on the more important factors correctly. And... always try to get hold of the extremes, in this case get a hold of: CIMB's which has a new outrageous TP of RM14.10, OSK's which has a TP of RM11.00 and the Citigroup sell which has the TP at RM5.77, and the UOB Kay Hian TP of RM6.88.

They all are different because they have chosen on different ways of interpreting what is good value, what is fair value, and which prevailing FACTORS will be dominating the share price going forward. OSK has held on to the notion that PB's strong loans and deposit growth and superior asset quality will be the focal points for the stock, thus allowing PB's to retain its premium rating and performance.

CIMB's outrageous TP basically affirms that no matter what the management is solid enough to counter and withstand any succession issues. CIMB thinks that earnings growth momentum will remain strong, supported by PB' superior ROE in the 20s, greater contribution from China and new avenue in bancassurance.

Maybank Investment has since upgraded the TP from RM7.60 to RM9.00, but still lagging the rest. They are negative because they see valuations having run ahead of fundamentals. They think that long term ROEs will be in the 15%-18% range rather than the 20s as was predicted by CIMB. The team also felt that beyond the present market rally, the economic recovery remains hazy.

If you ask me, I think CIMB is too fuzzy and trigger happy, all caught up with the partying mode. PB's current valuations have run way ahead. I am not seeing much upside at all, in fact I see it settling between RM8.50-RM10.50 for the next 12 months. The valuations and impressions I get is that it has "no room" for disappointment. It trades at a ridiculously high 80% premium in proice-to-book valuations against its peers - whether justified or not, it clearly show very little upside, unless you think it will trade at 120% premiums??!! My final say on PB, is that its not a stock you want to be holding in a market rally!!! Its a stock you want to be holding in a flat or negative market, its a fucking defensive stock.

So, Mr. Ooi, hope that clears it up a bit, not a defence by any means but hey... we have to remember that accounting is a modern day creation, so too is a stock market, we did not have both 150 years ago (I think). When its a man made thing (and not a natural science like physiscs or biology), it is very very hard to nail down what is the truth at any point in time. It becomes who can bullshit better.


p/s photos: Kristy Yeung Kung Yu