Malaysia registered commendable recovery in economic growth underpinned by strong domestic demand and recovery in exports. Supported by the Government’s proactive stimulus packages and accommodative monetary policies, the Malaysian economy grew at an annual rate of 8% in the first nine months of 2010 and is expected to register 7% growth for the whole year. The Malaysian banking system, which remained unscathed through the recent global financial and economic crisis, remained well capitalised and maintained healthy liquidity conditions and stable credit quality. The favourable conditions in the domestic market and in the region continue to provide the avenue for Malaysian banks to adapt and compete for new business and customers in the pursuit of business growth. The financial services sector remained a key enabler of the Malaysian economy. Bank Negara Malaysia had in 2010 taken steps to further liberalise the foreign exchange rules in allowing the use of the ringgit for offshore trade settlement and the abolition of limits on anticipatory hedging for exporters on foreign exchange risks. Given the resilience of the Malaysian banking sector, Bank Negara Malaysia issued 7 new banking licences to international banking groups with global and regional presence in the continuing process of the liberalisation and development of the Malaysian financial services sector inaccordance with the Financial Sector Master Plan.
Capitalising on the improved economic conditions in the region, the Public Bank Group continued to deliver yet another year of record profitability with pre-tax profit surpassing the RM4 billion mark for the first time. The Group continued to gain market share in its domestic core lending and deposit taking businesses whilst maintaining its superior asset quality. Having overcome the challenging economic and market environment in 2008 and 2009, the Group continues to demonstrate its resilience in withstanding economic adversity and the soundness of its proven core business strategies whilst reaffirming the Group’s unfaltering commitment to all its stakeholders in its delivery of excellence. The Group’s commitment to excellence includes, but is not limited to, the delivery of superior shareholder value and distinctive customervalue propositions, and fulfilling the Group’s obligations to its dedicated employees and the community at large.
To Our Shareholders
Record Financial Performance
A 44-year track record of unbroken profitability is a compelling testament to the success of a corporation in delivering consistent profits to its shareholders. Whilst pursuing sustainable profitability, the Public Bank Group achieved a new milestone in 2010 with a record pre-tax profit of RM4.09 billion, representing an improvement of 23.0% as compared to the preceding year, whilst net profit attributable to shareholders grew by 21.1% to RM3.05 billion. This translates to an improved earnings per share of 87.2 sen and a net return on equity of 27.1% in 2010.
The Public Bank Group will continue to pursue its strategy of strong organic business growth with a superior quality loan portfolio, improve productivity as well as building a broader and deeper customer franchise. The Group will also continue to uphold its risk management capabilities and maintain its strong corporate governance culture and practices in its pursuit of profitability and business growth.
Strong Organic Business Growth
Lending business
Growth in the lending business of the Public Bank Group remained healthy with total gross loans expanding by RM18.93 billion in 2010 to RM156.54 billion as at the end of 2010. This translates to a growth rate of 13.8%, which was above the Malaysian banking industry’s annualized growth rate of 13.5% as at the end of November 2010.
Domestic lending expanded at a faster pace during the year, growing by 15.6%, driven mainly by sterling 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”). This led to an increase in the Group’s domestic market share for loans and advances from 15.9% as at the end of 2009 to 16.2% as at the end of November 2010. In particular, the Group maintained its market leadership in both residential mortgages and passenger vehicle hire purchase financing in the Malaysian banking systems.
Deposit-taking business
The Public Bank Group continued with its pursuit of the expansion of its core customer deposits. The Group’s total customer deposits increased by RM5.98 billion or 3.5% to RM176.87 billion as at the end of 2010 from RM170.89 billion as at the end of 2009. However, domestic core customer deposits grew at a much faster pace of 15.0% against the backdrop of a 5.9% annualised growth in the industry’s corecustomer deposits as at the end of November 2010, which boosted the Group’s domestic market share of core customer deposits to 16.0%. The sustained growth in the Group’s deposit base is a reflection of the customers’ high level of trust and confidence in the Group.
Strong asset quality
The Public Bank Group has not only maintained its top ranking in asset quality amongst its peers, but also further improved its impaired loans ratio. Commencing in 2010, the Group adopted a more stringent criteria on the classification of impaired loans under FRS 139, the financial reporting standard in respect of the recognition and measurement of financial instruments. Under this more stringent impaired loan classification criteria, certain loans which are less than 3 months in default are now classified as impaired. Despite the more stringent criteria, the Group’s impaired loans ratio as at the end of 2010 remained low at 1.1%, which is approximately one-third that of the banking industry’s impaired loans ratio of 3.2% as at the end of November 2010. This represented an improvement from the gross impaired loans ratio of 1.4% as at the beginning of 2010.
The Public Bank Group’s strong asset quality is further supported by its healthy loan loss coverage ratio of 143.5% as at the end of 2010, which was higher than the coverage ratio of 97.4% for the banking industry as at the end of November 2010.
Medium-Term Performance
The consistent strong financial and business performance of the Public Bank Group is clearly demonstrated by the Group’s outstanding and resilient track record over the past five years, notwithstanding the more challenging economic environment during the global financial crisis in 2008 and 2009. Since the end of 2005, the Public Bank Group has:
• More than doubled its loan portfolio from RM68.10 billion to RM156.54 billion, increasing the Group’s market share of the domestic banking industry’s loans from 12.0% to 16.2% as at the end of November 2010
• More than doubled its customer deposits from RM75.15 billion to RM176.87 billion, with its market share
of domestic customer deposits rising to 14.5% as at end of November 2010, from 13.2%
• More than doubled its balance sheet with total assets of RM226.33 billion from RM111.69 billion
• Grown its profit before tax by 98.4% from RM2.06 billion to RM4.09 billion
• Increased its net profit attributable to shareholders by 108.9% from RM1.46 billion to RM3.05 billion
• Enhanced its net return on equity from 19.1% to 27.1%
Based on these key performance indicators, the Public Bank Group has clearly delivered to shareholders in the medium term.
Strategic Business Direction
Retail consumer and commercial banking businesses remained the core focus of the Public Bank Group, as these businesses contribute to more than 80% of the Group’s total profit. In particular, the Group’s lending business will continue to be supported by growth in home mortgages, hire purchase financing for passenger vehicles and retail commercial loans to SMEs. Leveraging on its leading market share in key retail lending segments, the Group continues to enhance its profitability through its pursuit of a strong organic growth strategy in its lending business, whilst prudently managing the asset quality of its balance sheet. In a market place that is intensely competitive, the Group continued to gain market share. With the aim to build a strong and long-term core customer deposit funding base, the Group will also focus on organic growth of its deposit-taking business to ensure that it continues to maintain a healthy and liquid balance sheet. The global financial crisis in 2008 and 2009 has further validated the Public Bank Group’s banking business model
which is based on prudent banking practices. This is also evidenced by the fact that the Group remained unaffected by any credit default risks associated with the sovereign debt turmoil in the European Union. The Group’s prudent credit culture and robust credit risk management infrastructure have enabled the Group to sustain the lowest impaired loans ratio in the Malaysian banking industry, despite the consistent double-digit growth in its loan portfolio year after year.
Guided by its long term goals, the Public Bank Group continued to pursue the expansion of its fee-based revenue, a strategy adopted by the Group since 2006. The pursuit of fee based revenue initiatives had led to the extensive investment in resources by the Group, particularly in human capital, as this is a key driver in building the necessary foundation for generating long-term fee-based revenue. The fee-based revenue strategy which carries a low or zero capital cost becomes more relevant in the context of the more stringent capital requirements and rules to be imposed on financial institutions post the recent global financial crisis.
With the increasing competitive pressure on net interest margins as banks sought to capture new business, the Public Bank Group recognises the importance of maintaining its core business strategies. In delivering healthy bottom line growth and long-term value to shareholders, the Group continues to focus on its efforts in pursuing strong organic volume growth, maintaining strong asset quality, increasing contribution from fee-based income, driving increased productivity and improving operational cost efficiency.
Strong volume growth in loans
Leveraging on its strong balance sheet and credit risk management capabilities, the Public Bank Group continued with a prudent but fast pace expansion of its lending portfolio. The Group’s ability to deepen relationship with its core customers, who are primarily retail consumers and SME customers, has effectively driven the momentum in its lending business. Proactive product innovation and packaging, competitive pricing, focused marketing and the strong PB brand have also contributed to the strong loan growth registered by the Group.
The expansion in the loan portfolio remained well diversified, with equally consistent growth in the retail consumer banking sector for the financing of residential properties and transport vehicles as well as commercial lending to SMEs, which collectively accounted for 69% of the Public Bank Group’s loan portfolio as at the end of 2010. The Group remained supportive of the Government’s efforts to develop the domestic economy and Malaysian businesses with the Group’s commitment to meeting the needs of SMEs, particularly in respect of working capital and investment financing. A total of RM10.80 billion of loans to domestic SMEs was approved in 2010, which accounted for 21.2% of the Group’s total domestic loans approved of RM51.02 billion in 2010.
Maintaining a liquid balance sheet
One of the lessons of the global financial crisis and the subsequent liquidity crunch is the value of a strong and stable retail deposit funding base as the foundation of a banking business. For its funding base, the Public Bank Group has been successful in maintaining its strong retail deposit franchise and a healthy and liquid balance sheet with the Group’s net loan to deposit ratio standing at 87.1% as at the end of 2010, despite the robust growth in its lending assets. This was a result of the Group’s strategy of building a long-term retail core customer deposit base so that its lending business expansion is adequately funded by a stable source of funds without being overly dependent on funding from the much more volatile interbank market.
The Public Bank Group’s practice of self-sufficiency in funding its lending business is consistently applied to its overseas operations, where each overseas unit adopts business plans to build and maintain a stable customer deposit base over the longer-term to fund their lending business.
Maintaining asset quality
In maintaining its credit prudency, the Public Bank Group continued to expand its loan portfolio without sacrificing credit standards which could compromise the asset quality of the Group’s balance sheet by having in place a rigorous credit risk management infrastructure and thorough and stringent policies at various stages of assessing loans from loan origination to loan approval. In addition, the Group is putting ng in significant resources to identify and monitor such loan accounts, as well as taking proactive recovery efforts in actively interacting with customers to advise, restructure, reschedule or rehabilitate distressed loans. Such preventive and proactive as well as interactive measures taken by the Group have enhanced customer relationship and loyalty while at the same time contributed to the Group consistently having the lowest impaired loans ratios in the Malaysian banking industry.
Islamic banking
Public Islamic Bank Berhad (“Public Islamic”) further expanded its business in 2010, reflecting the Public Bank Group’s strong commitment to further enhance the Group’s Islamic banking business in line with the objective of Bank Negara Malaysia to position Malaysia as a major international Islamic financial services centre. During the year, Public Islamic established its first full-fledged Islamic banking branch. Total assets of the Public Bank Group’s Islamic banking business grew by 3.5% or RM0.80 billion to RM23.66 billion as at the end of 2010, making Public Islamic the 4th largest Islamic bank in Malaysia. The Group’s Islamic financing and Islamic deposits recorded double-digit growth, increasing by 12.7% and 17.1% respectively to RM16.59 billion and RM15.31 billion respectively as at the end of 2010.
Developing fee-based revenue infrastructure
The expansion of the scale and scope of fee- or transactionbased revenue remains a key long-term strategic initiative of the Public Bank Group to sustain long-term profitability growth and improvement of its return on equity. With significantly low capital requirements to support fee-based revenue generation, this strategy promotes greater regulatory capital efficiency in light of the changes to the global regulatory capital framework which imposes higher capital requirements on banks.
In 2010, the Public Bank Group further built on its strategic initiatives to increase fee-based revenue from unit trust, bancassurance and wealth management products by strengthening the underlying infrastructure to enhance long-term fee based revenue flows
Public Mutual Unit Trust
As equity and other asset markets in Malaysia and globally stabilised or improved in 2010, Public Mutual Berhad, a wholly-owned subsidiary of Public Bank, delivered another year of strong business performance and outperformed the Malaysian unit trust industry in 2010. With sustained upward market momentum, Public Mutual’s net asset value (“NAV”) of funds under management further improved to RM40.60 billion as at the end of 2010, 14.1% higher than the NAV of funds under management of RM35.58 billion as at the end of 2009. Public Mutual’s overall market share of the private sector unit trust management business rose to 43.5%, from 42.5% as at the end of 2009. With 12 new unit trust funds launched during the year, Public Mutual currently manages a total of 84 funds with nearly 100 billion units in circulation. Leveraging on Public Mutual’s large force of unit trust consultants and distribution of trust units through the branches of Public
Bank, the Public Bank Group aims to further expand its unit trust customer base, which currently exceeds 2.39 million accounts.
Bancassurance
In the third year of its strategic alliance with ING Asia/Pacific to provide life, health, and investment-linked insurance products to customers in Malaysia and Hong Kong through the various distribution channels of the Public Bank Group, the Group continued its efforts to further build the bancassurance sales force and infrastructure to drive expansion of the Group’s bancassurance business over the long-term.
As part of the bancassurance initiative, the Public Bank Group and ING Management Holdings (Malaysia) Sdn Bhd (“ING”) had jointly applied to Bank Negara Malaysia for a Family Takaful licence, and which approval was obtained on 1 September 2010, to establish a family takaful operation. The family takaful operation will be undertaken through a new joint venture company, in which ING and the Public Bank Group will hold 60% and 40% of the equity interest respectively. The joint venture for the family takaful business will provide the Group with another avenue to expand its fee based revenue when the joint venture company commences operations as planned by the first half of 2011.
Wealth Management
In widening the range of saving and investment options to its customers beyond conventional deposit products, the Public Bank Group actively marketed alternative savings products such as foreign currency deposit accounts and gold investment accounts. Public Bank’s foreign currency deposits expanded by 37.6% in 2010 to stand at RM5.64 billion whilst gold investment accounts totalled 2.42 tonnes of gold valued at RM339.8 million. The Group has also launched several structured investment products over the years and will continue to introduce such products in the future.
Maintaining cost efficiency
The Public Bank Group remains committed to further improving its operational excellence in the running of the Group’s operations. This strategy to improve operating cost efficiency is even more pertinent in sustaining profitability growth in a competitive banking environment of narrowing margins. Some of the key initiatives undertaken in this direction include recruiting the right human resource, effective training and staff competency upscaling, continuous enhancement in work process efficiencies and effective deployment of resources and technology. When benchmarked against its peers, the Group’s cost income ratio of 30.7% for 2010 remained the most efficient and cost-effective amongst Malaysian banking groups and was also the lowest when compared against leading regional banks in the Asia Pacific region.
Shareholder Value
The ultimate measure of a company’s success is through the enrichment of its shareholders. Hence, the delivery of superior shareholder value remains a high priority for the Public Bank Group. Whilst financial institutions in various economies have either failed or were severely shaken during the global financial crisis, the Group’s consistency in delivering returns to shareholders and other stakeholders through such adverse and trying conditions continues to preserve shareholder value. strengthening the underlying infrastructure to enhance long term fee-based revenue flows.
