Case Study:  

Malayan Banking Bhd  

(16 April 2020)  

Step #1:  
What does it do?  

Malayan Banking Bhd (MBB) is the largest financial services conglomerate to

be listed in Malaysia.

Step #2:  
Check Stability Ratios

Loans, Advances Gross Impaired Loan Impairment Total Capital

& Financing Loan Ratio Coverage Ratio Ratio
Year (RM Billion) (%) (%) (%)

2014 403.5 2.34% 95.6% 16.2%

2015 453.5 2.37% 72.0% 17.7%

2016 477.8 2.64% 72.0% 19.3%

2017 485.6 2.65% 71.5% 19.4%

2018 507.1 2.41% 83.6% 19.0%

Q4 2019 512.3 2.65% 77.3% 19.4%

Notes:

1. Loans, Advances & Financing (LAF) Assets

(Growth in LAF Assets = Growth in Net Interest Income)

MBB has enlarged its LAF Assets, up from RM 403.5 billion in 2014 to
as much as RM 512.3 billion in Q4 2019. This has led to its growth in
net interest income, which resulted in higher total income (Step #3).
 2. Gross Impaired Loan Ratio (GILR)
(Low GLIR = Good Portfolio of Borrowers)

MBB has maintained its GLIR at 2.0-3.0%. At GLIR of 2.65%, MBB’s GLIR
is above its industry average of 1.6% currently.

3. Loan Impairment Coverage Ratio (LICR)

(High LICR = More Prepared a Bank is to Absorb Unexpected Loan Losses)

MBB’s LICR is 77.3% in Q4 2019, below its industry average of 99%.

This means, in terms of proportion, MBB is less prepared as compared
to its peers to absorb unexpected loan losses if it arises.

4. Total Capital Ratio (TCR)

(High TCR = Well-Capitalised Bank)

MBB’s TCR is 18.5% in Q4 2019, which exceeds the minimum required

capital conservation buffer of 10.5% set by Bank Negara Malaysia,
effective from 1 January 2019.

Step #3:  
Check Financial Results  

Figures in RM Billion unless stated otherwise

Year 2014 2015 2016 2017 2018

Net Operating Income 18,531 21,238 22,173 23,268 23,662

Earnings 6,716 6,836 6,743 7,521 8,113

EPS (Sen) 74.2 72.0 67.8 72.0 74.2

ROE (%) 12.68% 11.08% 9.84% 10.30% 10.77%

Notes:
 1. Total Income (TI)
(TI = Net Interest Income + Non-Interest Income + Islamic Banking ... etc)

MBB has grown its TI from RM 18.5 billion in 2014 to RM 23.7 billion in
2018. It is attributed to consistent growth in Net Interest Income and
Islamic Banking income during the period.

2. Shareholders’ Earnings (SE)

(Thumbs Up for Growth in SE)

MBB grew its SE from RM 6.7 billion in 2014 to RM 8.1 billion in 2018.
This is attributable to its increase in TI and steady cost-to-revenue ratio
during the period.

3. Return on Equity (%)

(The Higher, the Better)

MBB has a 5-Year Return on Equity (ROE) Average of 10.93% per

annum and hence, it means, MBB has made as much as RM 10.93 in
earnings a year from every RM 100.00 in shareholders’ equity from
2014 to 2018.

Step #4:  
Check Quarterly Results  

Figures in RM Million unless stated otherwise

Year Q1 2019 Q2 2019 Q3 2019 Q4 2019 Total

Net Operating Income 5,860 5,890 6,498 6,493 24,741

Earnings 1,809 1,941 1,999 2,449 8,198

EPS (Sen) 16.37 17.46 17.78 21.79 73.40

 Source: MBB’s Quarterly Reports

Notes:
Over the past 12 months, MBB has generated RM 8.198 billion in shareholders’
earnings or earnings per share (EPS) of 73.40 sen. Its 12-month ROE is 10.1%. It
means, MBB had made RM 10.05 from every RM 100.00 it has in shareholders’
equity for the last 12 months.

12-Month Latest ROE

= (Shareholders’ Earnings / Shareholders’ Equity) x 100%
= (RM 8,198 million / RM 81,571 million) x 100%
= 10.05%

As I write, MBB is trading at RM 7.58 a share. Thus,

Step #5:  
Check P/E Ratio  

For the last 12 months, MBB has made 72.79 sen in EPS. Its current P/E Ratio is
10.33, which is below its 10-year P/E Ratio average of 12.93.
P/E Ratio Formula:
= Stock Price / EPS
= RM 7.58 / RM 0.734
= 10.33

Key Statistics:
10-Year P/E Ratio Lowest: 11.67
10-Year P/E Ratio Highest: 14.56
10-Year P/E Ratio Average: 12.93
Current P/E Ratio: 10.33

Step #6:  
Check P/B Ratio  

As of 31 December 2019, MBB has net assets of RM 7.26 per share. Thus, MBB
has a current P/B Ratio of 1.04, which is below its 10-year P/B Ratio average of
1.62.

P/B Ratio Formula:

= Stock Price / Net Assets a Share
= RM 7.58 / RM 7.26
= 1.04

Key Statistics:
10-Year P/B Ratio Lowest: 1.19
10-Year P/B Ratio Highest: 2.00
10-Year P/B Ratio Average: 1.62
Current P/B Ratio: 1.04

Step #7:  
What’s my Dividend Yields?

In 2019, MBB has declared 64.0 sen in dividends per share (DPS), hence, having
maintained a stable dividend payout for the last 10 years as shown below:
Thus, its current dividend yield is 6.43% per annum, below its 10-year Dividend
Yield average of 6.54% per annum.

Dividend Yield Formula:

= (DPS / Stock Price) x 100%
= (RM 0.64 / RM 7.58) x 100%
= 8.44%

Key Statistics:
10-Year Dividend Yield Lowest: 5.38%
10-Year Dividend Yield Highest: 8.39%
10-Year Dividend Yield Average: 6.54%
Current Dividend Yield: 8.44%

Step #9:  
Understanding the Relationship of  
MBB’s Stock Price and its Shareholders’ Earnings  
 Source: Google Finance

Source: MBB’s Annual Reports

Notes:
In a glance, it looked like the growth in earnings has not led to growth in stock
prices.
But, if we look at MBB’s EPS or DPS figures, we would have a better picture
that explains why MBB’s stock price had been flat since 2012, hovering
between RM 7.50 - RM 10.50 for the last 6-7 years.

Source: MBB’s Annual Reports

I suppose, if you compare the graphs plotted for EPS and DPS with stock prices,
you would find that they mirrored each other.

So, what caused MBB’s EPS and DPS to fall despite a gradual rise in earnings for
the last 6-7 years?

The answer is: Dividend Reinvestment Plan (DRIP).

DRIP is a plan that allows MBB’s existing shareholders to receive its dividends
in the form of MBB shares, instead of cash. Starting in 2010, the take-up rate
for it has been kept at 80+%, indicating a high level of take-ups in DRIP by
investors.

Hence, it caused the number of ordinary shares issued to increase over time. It
has caused its EPS to be diluted over time. Hence, its stock price would then be
valued according to its diluted EPS, which explains why MBB’s stock price failed
to appreciate over time.

Thus,

High DRIP Take-Up Rates

= Number of Ordinary Shares Issued Increase.
= Earnings per Share Diluted to a Lower Figure.
= Stock Price to be Valued at Diluted EPS.

So, does that mean that DRIP is a bad thing to investors?

Not necessarily. It is inaccurate to judge MBB based on its stock price alone.

The total returns for investing in MBB should be calculated based on:

Total Returns:
= Dividend Yield + Capital Gains + Extra Shares Received.
When to Opt for Cash and When to Opt for DRIP?

First, it is best to set a fixed target price. Different people have different prices
that would be set in their minds. They can be based on their desired P/E & P/B
Ratio and dividend yields.

So, let’s say RM 9.00 is the price that you set. (I’m just giving an example).

If the DRIP offer is below RM 9.00, choose DRIP. If the DRIP is above RM 9.00, it
is evident that you should choose cash.

Hence, to accept DRIP or not, depends greatly on your target price. Please note
that I’m not suggesting RM 9.00 as the target price. If you ask me, my answer is
based on its average P/E Ratio, P/B Ratio and Dividend yields.

 
Snapshot:  
As at 16 April 2020, we have the following:

Step Criteria Results

Past Growth Sales & Profits

1 Present Profits Continue to Grow

Future Step #5: Targets FY 2019

P/E Ratio 10.33 (Below 10-Year Average)

P/B Ratio 1.04 (Below 10-Year Average)

2
Gross Dividend Yields 8.44% (Above 10-Year Average)

Price Trend Long-Term Flat, Short-Term Dip

Disclaimer:  
The case study above is intended for education & illustration purposes and is
strictly not intended to be an investment advice or recommendation to buy /
hold / sell the securities mentioned.

If you need specific investment advice, please consult a qualified or relevant

professional investment advisor. No warranty is made with respect to the case
study’s accuracy, adequacy, reliability, applicability, or completeness of these
information contained.

The author disclaims any reward or responsibility for any gains or losses arising
from direct and indirect use & application of any contents of the case study
above.