What’s up in Public Bank? Since its last bonus issue of shares about 10 years ago, Public Bank had remained relatively quiet, steadily growing amid an increasingly competitive market, without any new corporate exercise until two days ago

Updated: Saturday January 4, 2014 MYT 11:41:14 AM

What’s up in Public Bank?

BY CECILIA KOK

Since its last bonus issue of shares about 10 years ago, Public Bank Bhd had remained relatively quiet, steadily growing amid an increasingly competitive market, without any new corporate exercise until two days ago.Announcing on Thursday its intention to merge its local (L) and foreign (F) shares, Public Bank had inadvertently put itself in the limelight, whereby some dealers started to speculate that the latest corporate exercise could be a prelude to an even bigger corporate exercise.

As it stands, though, industry observers regard the proposed merger of Public Bank’s “L” and “F” shares as merely a “long overdue, normal process”.

Maybank Investment Bank Bhd (MIB), for one, points out that the proposed exercise “is more administrative in nature”.

MIB in its report says the move will have little bearing on Public Bank’s share price.

The proposed merger of Public Bank’s local and foreign shares is expected to be completed by the second quarter of this year. This will then see the lender’s “L” and “F” shares being quoted and traded on Bursa Malaysia Securities under a single stock code 1295.

“The existence of Public Bank’s ‘L’ and ‘F’ shares is purely historical in nature. In the days of script-based transactions, foreign investors were limited to buying just foreign shares, which represented a maximum 30% of Public Bank’s share capital base. Back then, Public Bank was one of several banks that had both their local and foreign tranches listed, but the others have since merged their shares, and today, Public Bank is the only one that has yet to do so,” MIB says in his report.

The primary difference between Public Bank’s ‘L’ and ‘F’ shares, MIB points out, lies in the voting rights.

“In the case of Public Bank’s ‘F’ shares, foreign investors were not entitled to voting rights once the 30% limit was exceeded.

“However, in the current Central Depository System (CDS) environment, whereby shares are traded electronically and both local and foreign investors can trade in either ‘L’ or ‘F’shares, there is no longer a need for two separately quoted shares, nor is there a need to restrict the voting rights of foreign investors,” it explains.

 

As at the end of September 2013, foreign shareholding in Public Bank stood at 31.7%.

Foreign ownership of domestic financial institutions is actually capped at 30%, but local authorities have already signalled their readiness to relax the limit on a case-by-case basis.

 

Succession plan intact

Public Bank is currently the third largest lender by asset size in Malaysia.

The bank was founded in 1965 by Tan Sri Teh Hong Piow.

Teh, 83, owns a 24% stake in Public Bank and sits on the company’s board as chairman.

Although under the recently enforced Financial Services Act (FSA), individual shareholdings in financial institutions are capped at 10%, exemptions apply to Teh, as well as Tan Sri Azman Hashim, who has a 17% stake in AMMB Holdings Bhd, and Tan Sri Quek Leng Chan, who owns 80% of Hong Leong Financial Group Bhd (HLFG), as their personal stakes in the respective banks were acquired even before the Banking and Financial Institution Act 1989 (Bafia) was implemented in 1989.

In the past, succession planning was a major concern of Public Bank’s stakeholders. This was until the bank’s top management, including Teh himself, came out in the middle of last year to assure stakeholders that the bank has put in place a succession plan, involving internal promotion of earmarked candidates to key senior management positions when there were left vacant by retired personnel.

It has been highlighted in media reports that Teh’s children have thus far not displayed any interest in taking over their father’s billion-ringgit banking business.

 

Speculation surrounding               Chinese interests

According to some dealers, counterparts from China have, on the other hand, displayed increasingly strong interests to acquire a controlling stake in Public Bank. It seems to them that the counterparts from China are the likely ones who could afford to take over Public Bank, which today stands as the most expensive bank in Malaysia.

Public Bank’s shares are currently trading at a price-to-book multiple of 3.4 times, compared with other banks in Malaysia, which are all trading at less than two times price-to-book. Malaysia’s largest financial institution Malayan Banking Bhd (Maybank) and the second largest CIMB Group Holdings Bhd, for instance, are both trading at price-to-book multiples of only 1.9 times.

Of the mergers and acquisitions (M&A) in the local banking sector in recent years, no deal had been done at more than two times price-to-book.

“Based on Public Bank’s current expensive valuation, it doesn’t make economic sense for any local player to acquire the lender,” says an industry observer.

“Public Bank has a strong franchise and brand. If a local bank were to acquire it, not only would there be significant overlap in operations, it would also likely lead to a dilution of the former’s strong network of branches and brand … at such an expensive price, it therefore is not economically viable for a local player to acquire Public Bank,” he explains.

The industry observer, however, points out that if an M&A were really in the cards for Public Bank, the potential acquirer would likely be a foreign player.

“It only makes sense if a foreign player were to acquire Public Bank, as it could then take advantage of the latter’s already-strong network of branches and brand to penetrate into Malaysia,” he explains.

A dealer notes that it seems investors from China are the most likely ones who could afford, and would be willing, to pay the expensive price for Public Bank.

Another source, however, dismissed such speculation. He stresses that the top management of Public Bank is actively working out a structure for a “family trust” to eventually own the bank in the future.

On that premise, Public Bank will be an interesting stock to watch in the coming days.

 

Strong performance

Public Bank was one of the best-performing banking stocks in 2013.

Through the year, the counter gained 20.05% to close at RM19.40 on Dec 31, 2013. It outperformed the benchmark FTSE Bursa Malaysia KLCI, which registered a full-year gain of 11.48%.

Public Bank’s shares also outperformed that of other banks, except Affin Holdings Bhd, which registered a full-year gain of 21.35%.

HLFG gained 13.66% in 2013, while Alliance Financial Group Bhd gained 10.96%, Maybank 10.07%, AMMB 8.55% and RHB Capital Bhd 3.27%. CIMB’s share performance was rather flattish, gaining only a marginal 0.26% through 2013.

Public Bank’s shares, which staged a clear uptrend from the beginning of 2013 to reach new highs towards the end of last year, closed at RM18.90 yesterday after losing ground on two consecutive days since the start of 2014.

StarBizWeek had earlier reported that the rise of Public Bank’s shares, particularly towards the final quarter of 2013, was spurred by expectations of a corporate exercise, quoting some dealers.

This was before announcement of the proposed merger of the bank’s local and foreign shares.

Analysts, however, had attributed the rise of Public Bank’s shares previously to mere window-dressing activities, with several of them pointing out that Public Bank’s shares is a core holding for many fund managers.

The decline of the counter in the last two days, they therefore say, was only to be expected as investors take profit.

Public Bank’s attractiveness lies in its steady earnings, with above-industry loans growth and strong fundamentals.

Its dividend yield of around 3%, however, is not the most attractive among its peers.

A Bloomberg survey of 22 research houses that have updated their ratings on Public Bank puts the average 12-month target price for the counter at RM18.80. There are only six “buy” calls on the stock against 14 “hold” calls and two “sell” calls.

Most analysts consider Public Bank, which is trading at price-earnings multiple of 16 times, as rather expensive, compared with other banks, which are trading near or lower than the industry average of 13 times price-earnings.

“Although Public Bank remains the market leader in the domestic retail-lending market, there has not been any new growth strategies vis-à-vis its peers (via M&As and overseas expansions),” Affin Investment Bank Bhd points out in its report.

“We view a potential merger with peers as a re-rating catalyst for Public Bank,” it says.

Public Bank’s net profit for the nine months to September 2013 improved 6.82% to RM3.04bil against RM2.84bil for the corresponding period in the preceding year, thanks to higher net interest income, higher net fee and commission income.

Consequently, Public Bank’s earnings per share rose to 86.78 sen for the nine-month period under review compared with 81.23 sen previously. Its revenue for the period in review rose 8.8% to RM11.35bil compared with RM10.43bil previously.