Maybank - Stock Debate #1 (Summary)
Lim Wuan Chin, Research Analyst Intern
Reviewed By Charlie Yuan Ting Jing, CFA, CQF
Full debate video: https://youtu.be/G0IAtylbKB4
Is Maybank a good investment? Following is a summary of both sides of the debaters.
Economics
| Proposition | Issue discussed | Opposition |
|---|---|---|
| The war between Russia and Ukraine resulted in an energy and food crisis that marked the beginning of the inflation era. The Consumer Price Index (CPI) in the United States is above 178.2%. The Federal Reserve has been raising interest rates to address the inflation problem, and US interest rate is expected to rise to 4.5% by the end of this year. This high interest will have negative effects on companies' stock values, especially technology companies, which have already plummeted by 20% to 60% of their value. Maybank is less likely to be impacted by an economic crisis because of its strong risk management controls, including its core capital adequacy ratio (CAR) of up to 16% above the minimum requirement of 4.5%, and the protection of Perbadanan Insurans Deposit Malaysia (PIDM). PIDM guaranteed a maximum protection of RM250,000 per depositor per member bank, which automatically protects deposits if the worst happens. In addition, Maybank’s market capitalisation is RM103.1 billion. The large scale and stability of Maybank give consumers a sense of security and trust, so Maybank has no shortage of customers. It is crucial to understand that the banking system is the most fundamental in any economy. If the banks fail, the country will also be at risk of bankruptcy. When the economy is struggling, all stock prices will drop; however, Maybank is very stable, so its stock prices will not be severely affected. | Economics: Stability | If the Federal Reserve continues to raise interest rates over the next three years, which will trigger a severe recession. Additionally, the United States' economic difficulties will have ripple effects throughout the global economy. For example, previous financial crises such as the subprime crisis and the dot-com bubble were caused by the Fed’s rapid rate increases. Presently, US’s yield curve is in an inverted shape—a condition that has predicted 100% of past financial crises. As the representative of Malaysia’s financial sector, Maybank will be significantly impacted by a financial crisis. According to past data, Maybank’s share prices dropped 48% and 80% during the subprime crisis and the 1997 Asian financial crisis, respectively. This data demonstrates that bank stocks are highly volatile and not a stable investment. For example, people will be unable to repay their loans because of the economic depression, and the bad debts of the bank will increase. This will eventually lead to the return of the subprime mortgage crisis. All of this will happen within three years. |
| Economic: Moratorium | The moratorium in budget 2023 was proposed again, which goes to show that there are still some uncertainties in the banking industry that put Maybank's financial stability at risk. The full extent of the Covid-19 pandemic's impact on lending and the likelihood of assets being hit will only become clear once the moratorium ends. |
Industry
| Proposition | Issue discussed | Opposition |
|---|---|---|
| Maybank has been at the forefront of digital banking for years. For example, Maybank has offered digital products such as the MAE app and QR Pay to allow customers to withdraw money contactless. | Industry: Digital Bank & Digitalisation | In 2022, the Malaysian Minister of Finance approved five successful consortiums for digital banking licenses, as announced by Bank Negara Malaysia (BNM). With more digital banks being issued permits, Maybank faces growing competitive pressure. Digital banks are probable to hold a significant advantage over traditional banks in various ways, including a broad customer base, new technology, convenience and efficiency, low operating costs and products that are more in line with public demand. According to research, digital banks such as WeBank led by Tencent and Revolut in the United Kingdom outperform traditional banks such as ICBC. These digital banks have more advantages than their traditional counterparts. Even though Maybank is undergoing digital transformation, it is difficult for a traditional bank to integrate with the latest digital system. On the other hand, digital banks are equipped with better technology cost, innovation, work efficiency and enterprise agility compared with traditional banks. Therefore, Maybank's transition from a traditional bank to a digital bank may not be smooth and successful. The industry and technology competition would adversely impact the performance of Maybank. |
Financial
| Proposition | Issue discussed | Opposition |
|---|---|---|
| Maybank has outperformed other banks by paying a dividend of 6.6% for the last 10 years, which is approximately 7%. This means that Maybank has paid a dividend of 60 sen every year for an average of 10 years. Maybank has a long-term dividend policy of paying out 40% to 60% of its net profit attributable to shareholders, but its effective dividend payout ratio is about 80% and is expected to reach 85% by 2022. Maybank’s dividend payout percentage of 6.6% is higher than the fixed deposit of 2.8% and the Employees Provident Fund (EPF) of 6.1% in 2021, which also offsets the inflation rate of 4.7% in Malaysia. In comparison, it is clear that Maybank is a worthwhile investment because its share is more attractive than fixed deposits and other banks. Additionally, according to Maybank's ownership structure, 60% of its total shares are owned by Amanah Saham and Employees Provident Fund (EPF). Based on these findings, it shows Maybank is a good investment as long-term investors are able to enjoy a 6.6% dividend despite market volatility. | Financial: Dividend | It is clear that Maybank is more inclined towards dividend investing than value investing. Generally, banking stocks are not a wise investment for those seeking high dividend payout ratios. Those who pursue high dividends would be better off buying REITs or defensive stocks because their dividends are more stable. Investors are more concerned about a company’s profitability--if there is no profit, how can a company pay high dividends to its shareholders? It is an undeniable truth that a company’s profitability determines its stock price. Dividend reinvestment plans could potentially boost Maybank’s capital, but they become unattractive if they are not translated into earnings growth. |
| Cukai Makmur is a one-time prosperity tax and has been removed in the 2022 financial report, meaning it will not have an effect on Maybank's after-tax profits. | Financial: Tax | The emergence of Cukai Makmur has raised the company's effective tax rate from 24% to 30%. This will undoubtedly have an impact on Maybank's 2022 profits. There is a high probability that Maybank’s dividend payout ratio will drop in 2022-making it a poor stock investment for dividend investors in the near term. |
Financial: Banking ratios
| Proposition | Issue discussed | Opposition |
|---|---|---|
| Net Interest Margin (NIM) Maybank has a net interest margin of 3.3% which outperforms the industry average of 2.2%. The net interest margin is Maybank’s long-term competitive advantage. When combined with its high net profit margin and the large scale of business, Maybank can generate a stable and gradually growing net interest margin, which is not available to other banks. Besides, the Malaysian government is expected to continue raising interest rates by 0.25% to 3% in November this year as the pandemic improves, thus further boosting Maybank's net interest margin as borrowers need to pay more interest on loans. Return on Equity (ROE) Maybank has a return on equity of 9.8%, which beats the industry average of 8.2%. A return on equity of 9.8% means that for every RM100 of capital invested by shareholders, Maybank can use that capital to generate a net interest margin of RM9.80. This means that shareholders' equity has doubled in 10 years, which proves that Maybank is more profitable than its peers. Maybank translates the profits it earns into shareholders' pockets through a higher dividend payout ratio, making the return on equity numbers more meaningful. Furthermore, Aminvest also mentions that Bank Negara Malaysia (BNM) is expected to raise interest rates in November as the pandemic improves, which would further increase Maybank’s net interest margin. This is expected to result in a double-digit return on equity growth of around 11%. Return on Assets (ROA) Maybank’s return on assets is below other peers by 5%. Generally, the common return on assets for the banking industry is around 1% to 2% since most of a bank’s capital consists of loans. Therefore, the financial leverage of the bank is higher and the lower return on assets can still result in substantial profits. | Profitability | Net Interest Margin (NIM) Maybank’s latest quarterly earnings fell by 10% and are expected to continue falling with more economic volatility. Return on Equity (ROE) Maybank's return on equity is 9.06% below the industry average of 9.76%, which means that Maybank's ability to generate profit by employing capital is weaker than its peers. The low return on equity may be due to the dividend reinvestment plan, resulting in an increase in capital, thus pulling down the return on equity. Return on Assets (ROA) Maybank’s 0.93% is below the industry average of 1.03%. Earnings per share (EPS) Maybank's income growth is slower than its capital growth, so Maybank's earnings per share remained constant at around 0.6 to 0.7 for an extended period of time. |
| Gross impaired loan (GIL) Maybank’s gross impaired loan ratio is 2.1%, which is higher than the industry average of 1.8%. Maybank’s higher gross impaired loan ratio is understandable as its total loan issued in 2021 totalled RM54.2 billion, accounting for 30% of the total loan volume in the market. It is worth noting that this ratio is only a prediction and does not represent the actual amount of bad debt. When the economic situation improves, the gross impaired loan of Maybank will be reduced, providing the bank with disposable funds for capital turnover or lending, etc. | Asset Quality | Gross impaired loan (GIL) Maybank’s business is mostly focused on corporate loans and mortgages, which account for 68% of the total. Due to the lack of qualified collateral for the corporate loans, Maybank’s overall risk will be higher than its peers—a fact reflected in its gross impaired loan ratio of 2.18% which is above the industry average of 1.8%. Loan coverage ratio The loan coverage ratio of Maybank is 122%, which is lower than 150% of the industry average and is the second lowest among its peers. This means that Maybank has less provision for bad debts, putting pressure on the credit cost. |
| Core Capital Adequacy ratio (CAR) Maybank’s core capital adequacy ratio is 16% higher than the 4.5% required capital adequacy ratio set by the industry, meaning that Maybank has enough capital to cover its risks and lower the probability of bankruptcy. | Capital | |
| Valuation | Price–earnings ratio (P/E) Maybank's dividend reinvestment plan has given them an expanding outstanding share, which means their book value will continue to increase, causing their price-earnings ratios to stagnate. The high price-earnings ratio has put pressure on Maybank's share price, which is unlikely to rise under these circumstances. Certain banking ratios paint a good picture of Maybank, while others do not. It is hard to use some ratios to judge whether Maybank is a good investment opportunity or not. The most important thing is to look at the overall performance to make a determination. |
Strategy
| Proposition | Issue discussed | Opposition |
|---|---|---|
| High risk will equal high return. Maybank can afford to take on more risk in order to make a higher profit and, as a result, benefit investors by distributing dividends to them. | Strategy: Risk and Return | The dividend given by the defensive industry is stable regardless of economic performance. Therefore, if economic risks are high, there is no disruption in paying dividends. Unlike the defensive industry, banks are classified as cyclical stocks. Maybank may not pay a dividend when the economy is struggling or when there is a high risk. This proves that Maybank is not the best investment for dividends. |
Author
This article is written by Lim Wuan Chin, Research Analyst Intern
Lim Wuan Chin is currently majoring in Finance and Investment at Tunku Abdul Rahman University of Management and Technology (TAR UMT). Wuan Chin joined TED Optimus Sdn Bhd for 3 months as a research analyst intern. She has participated in Bursa Malaysia Derivatives Virtual Trading Challenge 2021. She is an in-house author from TED Optimus.
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