A good example of a strong banking institution is Public Bank Bhd (PBB).

Founded in 1966 by Tan Sri Dato' Sri Dr. Teh Hong Piow, PBB has grown to be the second largest bank in Malaysia by market capitalization and the fifth largest listed company in Malaysia. In term of assets, PBB is the third largest banking group in Malaysia with the lowest non-performing loan ratios.

Investors who bought PBB at end-Oct 1996 and held it till end-Sept 2006 would have been more than pleased with the cumulative total return of 311.8%, or 31.2% return per annum!

What makes PBB stand out and become such a great investment for investors? PBB’s success can be attributed to its sound business operations as well as its focus in creating shareholders’ value.

Company Background

Since listing in 1967, PBB has grown from strength to strength. PBB has focused on growing its traditionally retail banking business into the domestic powerhouse that it is today, relying on solid management, effective deployment of human resources, strong business relationships with customers and prudent credit control policies to traverse Malaysia’s passage of economic prosperity and challenges.

The recent three years have seen Public Bank aggressively growing its balance sheet through retail loan products for mortgage, hire purchase and credit cards, supplemented by its strengthening corporate banking to small-and-medium sized enterprises.

With a maturing banking environment in Malaysia characterized by intensifying local competition and near-term liberalisation of foreign banks, PBB has also diversified its sources of income across the region, primarily into Hong Kong and greater China through its two subsidiaries - Public Financing Holdings (previously known as JCG Holding) and the recently acquired Asia Commercial Bank. Other regional operations include Cambodia, Vietnam, Laos and Sri Lanka.

Reasons for success

The key factors which make PBB a successful investment can be summarised below:

1) Prudent Lending Policy

Despite showing above market loans growth averaging 20 percent per annum over the last three years, PBB’s management stays focused on ensuring that lending and credit disciplines remain stringent. This is clearly evident from PBB’s non-performing loans ratio, which at below 2 percent currently, ranks it among the lowest in the industry where the NPL ratio averages 5 percent. This is an important ratio in measuring a bank’s asset quality and the likelihood of any negative earnings surprises resulting from write-offs of non-performing loans for any given quarter.

2) Strong Financial Rating

PBB’s robust and strong financial standing has also earned it a AAA-rating from Rating Agency Malaysia – a measure that characterizes the best corporate credit standing in the country. With its AAA-rating, PBB is able to reduce its cost of funding (a bank’s main source of “raw material”), thereby allowing it to earn either higher margins on its loans to customers or in pricing its loans more competitively to generate higher loans growth while maintaining normal margins. Both of these options of course have just one outcome – higher profits.