2011 was another commendable year for the Public Bank Group. In a market place that is intensely competitive, the Group continued to gain market share in key retail lending segments through healthy loan growth and effective customer acquisition strategies.With the expectation of global uncertainties and volatility persisting over the medium term, the Group remained vigilant and focused on balancing growth with prudent risk management.
2011 was ushered in with a degree of optimism that the global economy would be recovering, albeit at a moderate pace. Such expectation was however short-lived when the crisis of confidence developed over the issue of high national debt in the United States of America (“US”) and in the Euro zone and the implications of austerity measures on economic growth prospects. This resulted in the unprecedented downgrades of the sovereign debts of the US and several European countries. During the year, global economic conditions became increasingly challenging with the US and countries in the Euro zone experiencing slowing economic activities, sub-par economic growth and persistent high unemployment. Throughout 2011, global economic growth remained weak and uneven in the crisis-hit advanced economies.
Asian economies, on the other hand, continued to play a key role in global growth owing to stronger domestic economies. The Asian economies remained resilient despite several setbacks such as the global supply chain disruptions caused by the Japanese earthquake and tsunami and flooding in Thailand, as well as the surges in oil prices due to the “Arab Spring protests” and political unrest in the Middle East. However, the fall out of a prolonged unresolved crisis in the western economies could dampen Asian economic growth.
In our Malaysian domestic market, the Public Bank Group continued to operate in a healthy business environment owing to strong economic fundamentals and robust domestic demand, reinforced and generated by transformational policy measures and programmes being implemented under the Economic Transformation Programme (“ETP”) and the New Economic Model (“NEM”) of the 10th Malaysia Plan. The Malaysian banking system remained stable, underpinned by strong capitalisation, healthy liquidity conditions and strong asset quality. Owing to the Group’s prudent risk management practices, the Group is not exposed to any significant counterparty or market risks arising from the on-going sovereign debt crisis in the Euro zone.
The Public Bank Group’s regional businesses in Hong Kong, Cambodia, Vietnam, Laos and Sri Lanka continue to stabilise and improve in tandem with the better operating conditions in these jurisdictions. Having overcome the challenging market environment in 2008 and 2009, the Public Bank Group continues to demonstrate resilience in weathering economic headwinds and adversity. The Group has also demonstrated consistent efficiencies and cost-effectiveness in its unwavering commitment to the practices of ethics, innovation and excellence in the delivery of services to all our stakeholders.
To Our Shareholders Promise to Deliver Results
2011 was another commendable year for the Public Bank Group. The Group’s pre-tax profit continued to surpass the RM4 billion mark with yet another record RM4.61 billion, 12.8% higher as compared to RM4.09 billion the year before.
The Public Bank Group continued to deliver its 45th year of unbroken profitability and we are pleased to fulfill our promise to you, as shareholders, for consistent and sustainable returns on your investments in Public Bank shares. For 2011, net profit attributable to shareholders grew by 14.3% to RM3.48 billion. With an improved earnings per share of 99.5 sen, the Public Bank Group delivered a net return on equity (“ROE”) of 26.8% for the year. We are encouraged that the Public Bank Group is able to yet again deliver the highest ROE amongst its peer banking groups in Malaysia as well as one of the highest ROE when compared to peer banking groups in the Asia Pacific region.
For 2011, the Public Bank Group faced intense competition in its business as major competitors aggressively stepped up their efforts in pursuing market share gains. In particular, competition for loans and deposits within the Malaysian banking system continues to exert pressure on net interest margins. Notwithstanding the intense market competition, the Public Bank Group continued to remain focused on achieving growth momentum in its core businesses as well as proactively managing its yield and maintaining a healthy loan-to-deposit position. As a result, the Group’s total income grew by 8.3% to RM7.41 billion for
the year, supported by the sustained strong loan growth and deepening of fee-based income.
At the same time, the Public Bank Group continued to execute cost efficiency initiatives in pursuit of higher productivity levels. The Group’s operating costs remained lean, with operating expenses increasing marginally by 5.2%, less than the pace of income growth. The ability to maintain a low cost to income ratio of 29.8% as compared to the banking industry’s average cost to income ratio of 46.7% enabled the Group to generate outstanding shareholders’ returns.
The lending business of the Public Bank Group grew healthily with total gross loans expanding by 13.5% from RM156.54 billion in 2010 to RM177.69 billion as at the end of 2011. Domestic lending expanded at a faster pace during the year, growing by 14.1%, which was above the Malaysian banking industry’s annualised growth rate of 13.0% as at the end of November 2011. This was driven mainly by healthy growth in retail lending, particularly for purchase of residential properties and passenger vehicles as well as
commercial lending to small- and medium-sized enterprises (“SMEs”). Domestic market share for loans and advances was sustained at 16.3% as at the end of November 2011. The Group continued to maintain market leadership in residential mortgages, passenger vehicle hire purchase financing and SME lending in the Malaysian banking industry.
The Public Bank Group’s total customer deposits increased by RM23.50 billion or 13.3% to RM200.37 billion as at the end of 2011 from RM176.87 billion as at the end of 2010. With intensified efforts placed on growing core customer deposits, domestic core customer deposits grew by 10.9%, higher than the annualised growth of 10.3% in the industry’s core customer deposits as at the end of November 2011.
The sustained growth in the Group’s deposit base is a reflection of the customers’ high level of trust and confidence in the Group. Whilst the Public Bank Group pursued its business growth strategies, asset quality has not been compromised in the pursuit of growth.
We are pleased that the Group has not only maintained its top ranking in asset quality amongst its peers, but also further improved its impaired loans ratio. The Group’s impaired loans ratio improved further to 0.9% as at the end of 2011 from 1.1% as at the end of 2010. This is only one-third that of the banking industry’s impaired loans ratio of 2.7% as at the end of November 2011.
The Public Bank Group’s strong asset quality is further supported by its healthy loan loss coverage ratio of 188.9% as at the end of 2011, which was significantly higher than the coverage ratio of 96.3% for the banking industry as at the end of November 2011.
Consistent Performance over Medium Term
The outstanding and resilient track record of the Group over the past five years is a testament to its consistently strong financial and business performance over the medium term.
Since the end of 2006, and notwithstanding the more challenging economic environment due to the global financial crisis in 2008 and 2009, the Public Bank Group has:
• More than doubled its loans and customer deposits from RM84.36 billion and RM98.21 billion respectively to RM177.69 billion and RM200.37 billion respectively as at the end of 2011
• Increased its market share of the domestic banking industry’s loans and advances from 13.2% to 16.3% and its market share of domestic customer deposits from 14.2% to 14.7% as at the end of November 2011
• Expanded its balance sheet with total assets growth of RM101.62 billion from RM147.79 billion to RM249.41 billion
• Improved its profit before tax by 90.5% from RM2.42 billion to RM4.61 billion
• Doubled its net profit attributable to shareholders from RM1.73 billion to RM3.48 billion
• Enhanced its net return on equity from 21.9% to 26.8%
• Improved its impaired loan ratio from 1.9% to 0.9%
Strategic Direction Going Forward
Given its tested business model and its proven remarkable track record, we do not see the need for the Public Bank Group to deviate from its strategic business direction going forward, but we will always remain alert, vigilant, agile and adaptive in the market place. With the intensified competitive pressure on net interest margins as banks seek to gain market share, we recognise the importance for the Group to further reinforce its current core business strategies. With a view to driving business sustainability, the Group will continue to pursue its strategy of organic business growth whilst maintaining its superior quality loan portfolio. At the same time, the Group will strive to further improve productivity and focus on building a broader and deeper customer franchise.
• Sustaining Organic Growth Momentum
Retail consumer and commercial banking businesses remained the core focus of the Public Bank Group, as these businesses contribute to more than 70% of the Group’s profit and collectively accounted for 85.1% of the Group’s loan portfolio as at the end of 2011.
The key driver underpinning the Public Bank Group’s lending business lies in its consistent endeavour to deepen relationship with its core customers, who are primarily retail consumers and SME customers. Through proactive product innovation and packaging, competitive pricing, focused marketing, efficient delivery and the strong PB Brand, the Group’s lending business growth will continue to be supported by prudent yet fast paced expansion in home mortgages, hire purchase financing for passenger vehicles and retail commercial loans to SMEs.
In the home mortgages business, we note the continued growth in the domestic industry housing loans. With the demand from a growing population for essential housing needs, we continue to see growth opportunities in the more affordable low- and mid-range residential properties, which represent a major portion of the Group’s home mortgage portfolio. Pre-emptive regulatory measures such as a loan-to-value ratio cap on financing of the third residential property, higher real property gains tax and the more stringent lending guidelines issued by Bank Negara Malaysia on responsible financing were introduced aiming at avoiding
over-gearing of borrowers and curbing speculative property purchases. On the other hand, the Government’s initiatives such as My First Home Scheme, the Urban Housing Assistance Scheme and the People’s Housing Programme continue to promote home ownership amongst lower and middle income amilies. The Group’s lending direction on home mortgages which is geared towards owner-occupied and the broader based mass market segment is expected to benefit from these government initiatives in promoting home ownership.
2011 had been a challenging year for the passenger vehicle hire purchase financing business in Malaysia. Disruptions to global supply chains and production lines due to the devastating earthquake and tsunami in Japan as well as the recent floods in Thailand caused a slowdown in car production. In addition, the sale of passenger vehicles were also adversely affected by the amendments to the Hire Purchase Act, 1967, which imposed more stringent procedural requirements on the sale of vehicles. Given these challenging conditions in the passenger vehicle market, we are encouraged that hire purchase loan applications remained strong with loan approvals averaging above RM1 billion per month in 2011. These are, in no small measure, attributed to Public Bank’s strong market presence and its superior loan delivery track record and excellent customer service.
SMEs play an important role in the Malaysian economy with their strong contribution to the country’s economy and as a major provider of employment. The Public Bank Group remains supportive of the Government’s efforts to develop the domestic economy and Malaysian businesses with its commitment to meeting the financial needs of SMEs. Approval of loans to domestic SMEs reached RM12.39 billion in 2011 and accounted for 22.2% of the Group’s total domestic loans approved during the year.
• Maintaining Credit Standards
The Public Bank Group continued to expand its loan portfolio without sacrificing credit standards which could compromise the asset quality of its loan portfolio. In maintaining credit prudency, the Group has put in place a rigorous credit risk management infrastructure as well as stringent credit policies at all stages of assessing loans from loan origination to loan approval.
Intolerance of poor credit quality is reflected in the Group’s vigilance in identifying potential impaired loans,
putting in place significant amount of resources to identify and monitor such loans, as well as taking proactive recovery efforts to restructure, reschedule or rehabilitate distressed loans.
The outcome of the stringent credit discipline is reflected in the low level of impaired loans of the Public Bank Group with the impaired loans ratio standing at 0.9% as at the end of 2011. The Group takes pride in being the Malaysian banking group with the lowest impaired loans ratio, despite the consistent double-digit growth in its loan portfolio year after year.
• Driving Fee-based Revenue
The expansion of fee-based revenue is a key long-term strategic initiative which the Public Bank Group embarked on over 5 years ago, aimed at sustaining long-term profitability growth and improving ROE. The fee-based revenue strategy, which attracts a low or zero capital cost, promotes greater regulatory capital efficiency in the light of the changes to the global regulatory capital framework which imposes generally higher capital requirements on banks. As part of this strategic initiative, the Group has invested extensively in resources, particularly in its people, in generating long term sustainable fee-based revenue. Fee-based revenue grew by 8.4% in 2011 as the Group strengthened the underlying infrastructure in its unit trust, bancassurance and wealth management businesses.
The unit trust business undertaken by Public Bank’s wholly-owned subsidiary, Public Mutual, continued to show strong performance with a pre-tax profit growth of 17.5% in 2011. Public Mutual maintained its leading position in the private unit trust business with RM44.75 billion of net assets under management, accounting for an overall market share of 44.3% as at the end of 2011.
In the fourth year of our strategic alliance with ING Asia/Pacific, the bancassurance alliance led the Malaysian bancassurance market in new business volume generated in the first nine months of 2011. ING PUBLIC Takaful Ehsan Berhad, the joint venture family takaful business between ING Management holdings (Malaysia) Sdn Bhd and the Public Bank Group, which was launched on 5 April 2011, is also expected to contribute positively and further enhance the Group’s long-term fee-based revenue.
In the other areas of wealth management, Public Bank Group has also actively marketed alternative savings products such as foreign currency deposit accounts and gold investment accounts. In 2011, foreign currency deposits stood at RM5.16 billion whilst gold investment accounts totalled 4.248 tonnes of gold valued at RM677.9 million.
• Keeping the Balance Sheet Liquid
As the Public Bank Group expanded the asset side of the balance sheet, the Group also sought to ensure that the funding base remained healthy. In keeping the Group’s balance sheet liquid, a strong and stable retail deposit funding base is needed so that the lending business expansion is funded by a stable source of funds, without an over-dependence on funding from more volatile interbank markets. With net loan to deposit ratio standing at 87.2% as at the end of 2011, the retail deposit franchise remained strong. Core customer deposits account for a high 78.5% of total deposits from customers.
The Public Bank Group’s policy of self-sufficiency in funding the lending business is consistently and coherently applied to the Group’s overseas operations, where each overseas unit adopts the strategy to build and maintain a stable customer deposit base over the longer-term to fund their lending business.
• Keeping It Lean
The Public Bank Group remained committed to further improving its operational efficiency in the running of the Group’s operations. The strategy to improve operating cost efficiency and productivity is even more crucial in sustaining profitability growth in a competitive banking industry that is faced with narrowing net interest margins. The key initiatives undertaken by the Group to improve productivity include getting the right people, providing effective training to improve staff competency, enhancing work process efficiencies and deploying resources and technology where it is most effective.
The cost to income ratio is the best long-term measure of the cost efficiency of a banking group. For 2011, we take pride in the Public Bank Group’s cost to income ratio of 29.8%, making the Group the most-efficient amongst Malaysian banking groups, as well as in comparison against leading cost-efficient regional banks
Preserving Shareholders’ Investment Value
The ultimate measure of a company’s success is the enrichment of its shareholders. For the Public Bank Group, we strongly believe in the delivery of superior shareholder value. Our sustainable business model with over four decades of unbroken profitability track record underpins the value of the investment of shareholders in Public Bank. Other than through consistent and strong financial performance, our ability to build the long-term intrinsic value of your investment in Public Bank is also determined by, amongst other factors, how well we manage the Bank’s capital to deliver consistently high investment return to shareholders.
• Managing Capital Astutely
The Public Bank Group’s strong balance sheet provides the Group with a growing capital base. The challenge for the Group is how best this growing pool of capital is deployed. To meet this challenge, we need to proactively manage a capital structure which is efficient in driving strong return on equity, whilst at he same time maintain a balance of the need for capital to support the organic growth strategies of the Group, the need to meet with a more stringent regulatory capital regime and shareholders’ expectation of returns.
The Basel III standards, a prudential reform of the global banking system after the 2008 and 2009 financial crisis, poses an imminent challenge for banks and financial institutions to maintain a higher level of shareholders’ capital that is required to support their businesses. The key changes to the regulatory capital regime include the focus on high quality capital, in particular equity capital, higher minimum capital requirements generally, imposition of capital buffers for capital conservation and counter cyclical purposes, as well as the introduction of internationally harmonised leverage ratios and minimum global liquidity standards.
We are confident that the Public Bank Group is well positioned to meet the challenges of the broadly more prudent capital regime without inhibiting the Group’s organic business growth strategies. As part of its capital management plans, Public Bank raised RM3 billion of Tier 2 capital during the year via the issuance of subordinated notes under the existing subordinated Medium Term Note Programme. In meeting the requirements of the regulatory capital regime reforms, the Group will continue to effectively manage its capital structure and maintain maximum financial flexibility to pursue strategic objectives whilst maximising shareholder value.
• Paying Out Consistent Dividend
Public Bank will pay a 2nd interim single tier cash dividend of 28 sen per share. The Board of Directors does not propose the payment of any final dividend.
The 2nd interim single tier cash dividend of 28 sen, together with the 1st interim single tier cash dividend of 20 sen paid in August 2011 will mean that shareholders would receive a total net cash dividend of 48 sen per share for 2011. This translates into a net dividend yield of 3.6% based on the share price of RM13.38 per Public Bank (Local) share as at the end of 2011. The total cash dividends paid and to be paid to shareholders for 2011 would amount to RM1.68 billion, representing 48.3% of the Group’s net earnings for 2011.
Taking into consideration the allocation of capital resources by the Public Bank Group to support its organic business growth strategies, the Group endeavours to maintain a consistent and regular dividend payment policy that promotes a stable stream of return to shareholders, subject to the approval of Bank Negara Malaysia as required by the Banking and Financial Institutions Act, 1989.
• Delivering Superior Returns to Shareholders
As a blue-chip stock, the Public Bank Group’s ability to deliver superior returns to shareholders, both over the medium-term and the long-term, demonstrates the superiority of its returns to shareholders.
Taking a 5-year medium term period, a shareholder of Public Bank who purchased 1,000 Public Bank (Local) shares at a price of RM7.75 per Public Bank (Local) share at the end of 2006 with an investment outlay of RM7,750 and held it for 5 years to the end of 2011 would have received gross dividends totalling RM2,971 and have 1,043 Public Bank (Local) shares worth RM13,955 based on the closing share price of RM13.38 per share as at the end of 2011. Together with the dividends received, this investment would have given the shareholder an annual rate of return on investment of 18.9% or a total return of 118.4% for the 5-year period.
If a shareholder of Public Bank had bought 1,000 shares in Public Bank when it was listed in 1967, and assuming the shareholder had subscribed for all rights issues to date and had not sold any of the Public Bank shares, he would have, at the end of 2011, 135,398 Public Bank shares worth RM1,811,625 based on the share price of Public Bank (Local) shares of RM13.38 at the end of 2011. In addition, he would have received a total gross dividend of RM776,137 whilst having only invested a capital outlay of RM48,760, including subscription for all rights issues. The dividends received and the appreciation in value translate to a remarkable compounded annual rate of return of 19.5% for each of the 44 years that this shareholder has held the shares in Public Bank since it was listed in 1967.
Medium-Term Scenario Planning
In managing the strategic direction of the Public Bank Group and upholding the Group’s market leadership position, the Group is guided by its medium-term planning processes which include putting into place a 3-year medium-term plan to deliver continued growth and profitability as well as to enhance stakeholder value. In setting the Group’s medium-term plan for 2012 to 2014, we had evaluated the delivery of the Group’s immediate past medium-term plan mapped out 3 years ago as a basis to guide us in setting the current year’s medium-term plan.
The key performance indicators (“KPIs”) of the Public Bank Group’s 2008 medium-term plan and its actual delivery in 2011 are set out below:
Despite the intensely competitive business environment in which the Public Bank Group operates and notwithstanding the financial crisis of 2008 and 2009 which nearly brought the global financial system to its knees, the Group achieved and surpassed five out of seven of the medium-term KPIs set in 2008. The industry-wide narrowing of interest margins coupled with the higher capital retention in light of the impending implementation of Basel III standards resulted in a lower return on average equity of 26.8%. Taking account of external environment challenges and rising competitiveness, the Group continues to demonstrate its ability to achieve its medium-term KPIs.
For the 3-year period from 2012 to 2014, the Public Bank Group’s macro key performance targets are:
With the expectation that global uncertainties and volatility will persist over the medium term, we remain vigilant in balancing growth objectives and sustainable returns. The Malaysian economy, which saw healthy growth in 2011, may still be vulnerable to global developments as the Malaysian economy cannot insulate itself given its extensive international trade links. The global growth outlook has become significantly more uncertain with heightened downside risks. In particular, the possible escalation of the sovereign debt crisis in the Euro zone and the twin deficits overhang in the US could undermine the prospects for continued global growth.
Whilst the prospects for the Malaysian economy will remain positive in 2012, there remain some key challenges that the Public Bank Group has to face up to and overcome. These include :
• The economic slowdown and financial market volatility stemming from the sovereign debt crisis and other fiscal concerns in the advanced economies and its adverse effects on demand for the country’s exports and capital flows.
• Further intensification of competition amongst participants in the Malaysian banking and financial services sector may exert greater competitive pressure on pricing and the industry’s human capital. Under the Financial Sector Blueprint 2011-2020 recently released by Bank Negara Malaysia, greater operational flexibility will be introduced to locally-incorporated foreign banking institutions which include the gradual uplift of restriction on non branch delivery channels, greater flexibility to establish physical branches and to conduct hire purchase business. These initiatives may further increase the competition in the domestic banking industry.
• The higher capital requirements for financial institutions globally and in Malaysia resulting from the Basel III capital framework introduced by the Basel Committee of Banking Supervision.
In the face of these and other challenges, the Public Bank Group will need to embrace an even more aggressive pursuit of business innovation and operational efficiency in delivering on the Group’s commitment to excellence to all of its stakeholders. The Group will also need to reinforce its prudent and effective balance sheet management strategies to sustain profitability in light of the more uncertain environment. On the service delivery front, the Group will need to uphold its superior customer service and delivery excellence. The steady market share gains by the Group over the past several years, together with the continued strengthening of its asset quality provide the Group with the foundation to face up to the challenges in 2012 from a position of strength.
Given the financial services sector being identified as one of the 12 National Key Economic Areas under the ETP and the NEM, the Public Bank Group will continue to position itself to offer innovative and competitive banking and financing products and services, including Islamic banking and financing products and services, in support of the country’s aspirations to achieve developed country status.
Given the Public Bank Group’s resilient financial performance track record, excellent asset quality and its healthy capital structure, and most importantly, the unwavering commitment to excellence of all levels of staff, the Group has the capacity to flexibly implement its key strategies to meet the challenges in 2012 and beyond, thereby continuing to contribute to the stability and integrity of the financial system and play its role in the long-term development of the Malaysian economy.
Certainly, the Public Bank Group, having overcome all the challenges faced in its 45-year journey thus far, will be ever much stronger and resilient as a leading financial services provider, and is well set to forge ahead and continue to deliver excellence to its stakeholders in the next several decades and beyond.