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Public Bank game changer


The expected retirement of Teh could herald a new beginning for the bank

THERE are several items which are a fixture in Public Bank Bhd .

For instance, try walking into any Public Bank branch and you will find the familiar photograph of Tan Sri Teh Hong Piow, the 87-year-old founder, framed on the wall of the banking hall.

Another fixture is the number of millionaires that the banking group has created. Every year, a segment of the annual report will be dedicated to the number of shares an early investor of Public Bank would be holding now.

In the latest annual report, it was illustrated that a shareholder who had bought 1,000 Public Bank shares in 1967 (the year it was listed) and held on to them, would be holding 148,938 shares as at end-2016 valued at RM2.94mil.

In addition, that shareholder would have received a total gross dividends of RM1.2mil.

That is the winning tagline that has endeared the bank and its founder to both shareholders and staff.

Teh is no ordinary head of a financial institution. He is the face of Public Bank and is credited with building the bank to what it is now. The bank’s asset size and branch network belies the value the market attaches to it.

Trading at 2.3 times book value, Public Bank is easily the most expensive financial institution in the region with rivals commanding valuations of between 0.4 times and 1.4 times.

The valuation is largely due to the returns that the bank has given to shareholders consistently.

Its return on equity at 15.6% stands above the industry average of 11.6%, while its return on assets is 1.4%.

When Teh announced last week that he would be taking a backseat in January 2019, it hardly created any ripples because his departure has been speculated about in the last three years.

The tycoon will retire as chairman come that year, but will not be totally out of the picture.

He will remain as the bank’s adviser and assume the title of “chairman emeritus” in recognition of his contributions to the bank he founded at the age of 35 in 1965.

The announcement of Teh’s departure some 17 months ahead of the real schedule underlines the strategy of the banking group in putting in place a succession plan and making it public.

Overhang due to Teh’s shareholding

Despite the group’s constant assurance of a smooth transition should Teh leave one day, a Public Bank without the patriarch is a scenario that nobody can dare predict with certainty.

It is only to be expected.

None of Teh’s children are with the bank. And his 24% stake, valued at RM19.24bil, makes it an elusive takeover target.

Based on Public Bank’s expensive valuation, it is hard to find a buyer for his block of shares.

It is not only the valuation that would limit buyers.

Any party wanting to buy that block would need Bank Negara’s approval.

So, there are limited buyers.

Under banking regulations, individuals are not allowed to own more than a 5% stake each in a financial institution and in the event it happens, they are to get approval from the central bank.

In the case that happens, they are required to get approval from the central bank.

Currently, there is an unwritten “grandfather rule” that applies to Teh and two others bankers, namely, Tan Sri Azman Hashim of AMMB Holdings Bhd and Tan Sri Quek Leng Chan of Hong Leong Financial Group Bhd .

These individuals are allowed to hold their current stakes in a bank, as their personal stakes in the respective banks were acquired before the Banking and Financial Institution Act 1989 or Bafia – the Financial Services Act 2013’s predecessor – was implemented in 1989.

Azman’s AMMB is currently in merger talks with RHB Bank Bhd and if he stays as a shareholder in the enlarged group, his stake would be diluted to less than 6% from 13% now.

If that’s the case, it would leave Teh and Quek as the first-generation bankers with more than 5% in their respective financial institutions.

According to banking sources, the question of Teh putting his block of shares in a trust is also remote because any movement of more than 5% would need Bank Negara’s approval.

Banks are different compared with other large companies where their substantial shareholders can put their wealth in a trust.

“Banking is a highly regulated industry and any movement of shares of 5% would need regulatory approval,” says a corporate lawyer.

He says the “grandfather rule” exemption would likely stop with these founder bankers and cannot be passed on to their children.

Going forward, institutionalising banks’ shareholding is inevitable. And it applies more in the case of Public Bank because of the concentration in the shareholding with Teh.

Till now, the octogenarian has shown no inclination to part with his block of shares, and the prerogative to do so is entirely his.

One way to go around this, say some, is to break up the block to less than 5% each as what happened in Alliance Financial Group Bhd (AFG) last year.

In that case, Langkah Bahagia Sdn Bhd’s effective 14.8% interest in AFG’s, held through Vertical Theme Sdn Bhd (AFG’s single largest shareholder), was sold to three individuals. Essentially, the emergence of these individuals as owners of the 14.8% stake in AFG circumvented Bank Negara’s ruling and allowed the deal to be done without the regulator’s approval.

Besides Public Bank, Teh also controls about 44% in insurer LPI Capital Bhd where he is chairman.

Business as usual for now

Monday’s announcement hardly ruffled investor sentiment, albeit for a knee-jerk 26-sen fall in share price. Its shares have since rebounded to close at an all-time high of RM20.76 yesterday, giving it a market capitalisation of RM80.16bil.

For now, it appears to be business as usual for the country’s second-most valuable bank and third largest in terms of assets known for its conservative business approach.

Strong and stable: Earnings-wise, the bank can boast of over five decades of unbroken profitability, even during the height of the 1997/98 Asian Financial Crisis that saw many companies going belly up.
Strong and stable: Earnings-wise, the bank can boast of over five decades of unbroken profitability, even during the height of the 1997/98 Asian Financial Crisis that saw many companies going belly up.

While Teh is a central figure where Public Bank is concerned, the running of the bank has been left largely to professional managers, led by the banker’s most trusted lieutenant, Tan Sri Tay Ah Lek, who has been managing director and chief executive officer (CEO) since 2002.

“You can say the bank is on auto-pilot mode ... it has the process in place with the day-to-day undertakings residing in the hands of professional managers,” quips a banking executive.

Still, there is a perception that there appears to be too much dependence on the old guards.

Also, is Public Bank changing the way it runs to cope with future challenges in the financial sector? With the growing challenges in the banking landscape due to disruptive technology, will it be able to move fast enough?

So far, Public Bank has earned itself the track record of being among one of the biggest success stories on the local stock exchange.

The numbers speak for themselves.

Public Bank’s strong franchise among the smaller businesses with its network of branches has allowed it to capture a large size of the retail and small and medium-sized loan market segment that accounted for a large portion of its total loans as at financial year 2016 (FY16).

Earnings-wise, the bank can boast of over five decades of unbroken profitability, even during the height of the 1997/98 Asian Financial Crisis that saw many companies going belly up.

For FY16 ended Dec 31, it made a record RM5.2bil in net profit, while in the first half of FY17, net profits already rolled in at RM2.58bil.

The bank’s stability in asset quality is a major appeal, not forgetting the attractive dividend payouts it dishes out.

Its cost-to-income ratio – a measure of how efficiently a bank is run – at 32.3% is amongst the lowest as opposed to its peers.

While shareholders of the bank have nothing to complain about, Public Bank is seen as lagging behind in facing the future challenges of the financial landscape.

New players are coming in and operating at a cheaper cost compared to traditional banks.

For the longest time, the financial sector was seen as being insulated from disruptive technologies.However, fintech service providers such as Peer-2-Peer operators are ready to take away market share from banks.

“Is Public Bank ready for the challenging banking landscape post the Teh era?” asks a banker.

“It is very much reliant on the traditional lending business. It does not have much wholesale and corporate loans.

“The rates it gives for deposits are not competitive. When corporates look at financial institutions to place their deposits, Public Bank is not usually on their list,” says the banker.

Seasoned team of bankers

While the banking group has some young faces in its management team, some reckon that there is still a big gap in terms of getting new blood in the top echelon.

Based on the group’s information on its website, the average age of its board members is 72.

Its oldest board member is Teh himself, followed by the bank’s deputy chairman Datuk Seri Lee Kong Lam, who is 75.

Tay, meanwhile, is 74 years old, followed by directors Lai Wan, 73, and Tang Wing Chew, 72.

The directors below the age of 70 are its female representatives, namely Lai Wai Keen and Cheah Kim Ling.

Bankers say the most obvious successor to the chairman’s role is Tay.

Having been a pioneer staff of the group, Tay is in tune with Teh’s vision, they say. The bank’s deputy CEO is Datuk Chang Kat Kiam.

Recall that 62-year-old Chang was appointed as deputy CEO early last year, following the departure of accountant Quah Poh Keat.

Quah was seen as a successor to Tay but opted for early retirement in January 2016 three years after his appointment as deputy CEO.

Chang is seen as one of the bankers in the mould of Teh and Tay. A seasoned banker, he has been with the banking group since 1975.

Beyond Chang, the line of succession in Public Bank is not so visible.

New and young blood could provide the impetus to take the bank to the next level, reckon some.

Whatever the case, a scenario without Teh in Public Bank will certainly be a game changer for the bank.

Related story:

From conservative to fastest growing bank

Public Bank , teh Hong Piow , banking

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