Public Bank Bhd has been a favourite among investors, especially long-term funds. It has attracted attention lately as the merger-and-acquisition fever seems to be rising again in the banking scene. Public Bank chairman Tan Sri Teh Hong Piow shares his views with StarBiz acting editor YAP LENG KUEN on topics relating to succession, foreign investment and the economy.
StarBiz: Regarding management succession, please shed some insight on the professional management plan for the bank.
Teh: Management succession is already in place. The group has a strong professional management team consisting of experienced bankers and senior staff who have been with the group for a long time.
Our managing director has been working with me for more than 40 years. Our executive director is a former senior central banker with 28 years of experience with Bank Negara. Our senior management team is assisted by a group of professional staff with varied backgrounds and experiences whom the bank has been grooming over the years.
Over 80% of our senior management staff and branch managers have come through the ranks in the group. The core values of the organisation such as prudent risk management, strong credit culture and superior service standards have been entrenched in the culture of the staff and the bank as a whole.
StarBiz: Foreign investors are eyeing the banking sector for acquisition of stakes. How do you view this development?
Teh: I think this development is very healthy and positive for Malaysia. The interest by foreign investors reflects their long-term confidence in the prospects of the Malaysian economy and also in the strength, stability and potential of the banking sector to generate attractive returns on investment.
Such strong confidence contributes positively to business sentiment and to the Government’s efforts to attract new foreign direct investment to our country.
StarBiz: Is the level of foreign investment in Public Bank expected to rise?
Teh: The level of foreign investment in Public Bank’s shares is about 37%. Whether this percentage will change or not depends on market forces.
StarBiz: What large deals will Public Bank be looking forward to this year?
Teh: Currently, Public Bank is not looking at any large deal this year.
StarBiz: Is Public Bank looking at regional expansion?
Teh: We do not have any immediate plan to further expand our regional operations to countries in which we are not present today. The group’s management and resources will continue to be focused on the domestic market, which contributed close to 90% of the group’s pre-tax profit last year.
Furthermore, we expect more challenges will be faced in the domestic market with its continued liberalisation and the implementation of the Financial Sector Masterplan, which will continue to drive the competitiveness of the Malaysian financial services market.
StarBiz: How is the banking business in Sarawak doing?
Teh: Our banking business in Sarawak is doing well. Currently, the bank has 19 branches in Sarawak, of which 13 are ex-Hock Hua Bank branches.
In the first quarter of this year, the Sarawak branches contributed over 10% of the bank’s pre-tax profit and over 9% of total loans and advances, and deposits.
The asset quality of our Sarawak branches is well contained with the gross non-performing loans (NPLs) ratio kept at 3.4% (based on a 3-month rule) at end-March this year.
In terms of loans growth, the Sarawak branches achieved about 6% growth in the first quarter of this year. Despite the satisfactory performance, we believe that there is more room for these branches to grow this year.
StarBiz: How is Public Bank’s business in Hong Kong growing, especially now that the economy there seems to be picking up?
Teh: The bank’s main area of business in Hong Kong, which is the consumer financing business of the bank’s subsidiary, JCG Finance, showed improvement in the first half of this year compared with last year.
The level of loan loss charges dropped in the first half of this year, although it has yet to revert to pre-crisis levels. We hope this positive development will continue for the rest of this year.
However, despite the improved economic outlook for Hong Kong, JCG’s consumer lending business is still slow and will take some time before it fully recovers as consumers in Hong Kong are still very cautious.
StarBiz: Banks, including Public Bank, are restructuring Tier-1 capital and replacing it with Tier-2 capital. Please comment on how Public Bank aims to benefit from this exercise.
Teh: The recent subordinated note issuance which qualifies as Tier-2 capital is one of the ways that can help Public Bank to more efficiently manage its capital. The subordinated note issuance also helps the bank achieve a greater diversification of its sources of capital from its traditional domestic sources of capital funding and establish an international benchmark for Public Bank. In a rising interest rate environment, the subordinated note issuance also provides greater flexibility for Public Bank to manage the interest rate and maturity profile of its asset-liability portfolio.
StarBiz: Are there other fund-raising exercises being considered, and if yes, for what reason?
Teh: We do not have any immediate plan to raise further funds after the recent subordinated note offering. However, we will keep our funding options open and will consider tapping the markets, whether domestically or internationally, for funding opportunities should the need arise.
StarBiz: How far can the private sector go in terms of being the engine of growth for the economy?
Teh: The private sector has shown positive signs of growth, particularly in the first half of this year. There is ample room for the sector to grow and once again resume its role as the engine of economic growth.
Last year, private investment only recovered by 2%, after a 20% drop in 2001 and another drop of 13% in 2002. The percentage of private investment of gross national product (GNP) was still low at 11% last year, down from 36% in the period immediately before the Asian financial crisis in 1997/98.
StarBiz: How do you see consumer spending and domestic demand? Is there any levelling off?
Teh: Similar to the prospects for private investment, there is room for private consumption to expand. Last year, the percentage of total private consumption to GNP rose to 51%, which was still low compared with 60% and above for most developed economies such as the United States and Japan.
Consumers still have the capacity to spend as the household debt service burden is still moderate. Households also have the capacity to spend as there is a positive gap of more than 3% of GNP between the ratio of household total deposits to GNP and the ratio of household debt to GNP. At the same time, gross national savings are still high at more than 35% of GNP this year.
StarBiz: What is your view on the current efforts to make government-linked companies (GLCs) more attractive on Bursa Malaysia and the increasing efforts to strengthen ties across the causeway and to lure foreign direct investment, especially to new growth areas?
Teh: I am very positive about this development as the reform of GLCs is intended to achieve better returns on investments made by the Government.
Efforts to enhance the performance of GLCs will not only unlock the value of the Government’s investments and improve allocation of scarce resources, but will also provide an avenue for the Government to tap funds and reduce its fiscal deficits, if the need arises. I expect this effort will provide further impetus to corporate development and the capital markets in Malaysia.
The efforts to further strengthen bilateral ties with Singapore will help improve trade and investment flows between the two countries. They will also enhance tourism activities in the two countries. There is ample room for both countries to harness areas of mutual interest and co-operate, such as in tourism and ICT (information and communications technology).
StarBiz: There are views that the economy is slowing down a bit in the second half and forecasts are being slightly lowered for next year's economic growth. Please comment in the light of US interest rate increases and the potential impact on the Malaysian economy?
Teh: Of late, there have been several factors that have affected the outlook for the global economy for next year. These factors are high and uncertain oil prices, rising interest rates in the US and growth deceleration in China.
We do not expect these factors to derail global growth as some of them are transitory in nature. For example, oil prices could fall back if the situation in the Middle East improves and China returns to a sustainable growth path, possibly after a mild correction.
The recent 25-basis-point increase in the Fed funds rate in the US was much anticipated as the Fed’s low interest rate policy is no longer sustainable.
Malaysia is not expected to be significantly affected by these factors due to its increased economic resilience. Since the Asian financial crisis, Malaysia has developed greater resilience and stronger fundamentals to withstand external challenges.
In the post-crisis period, growth in the domestic industries and domestic demand was strong, helped by the cumulative effects of the expansionary fiscal and monetary policies.
Furthermore, Malaysia’s direct exposure to China is quite small as Malaysia's exports to China is only over 6% of total exports. Interest rates in Malaysia are expected to remain stable and thus pro-growth, given the ample liquidity in the banking system.
Malaysia’s external position is also strong due to high international reserves and low external debt.
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