Public Bank Earns First-Place Honors in Malaysia

By JAMES HOOKWAY

Sometimes the old way of doing things is the best way of doing things. A few years ago, many investors overlooked Malaysia's Public Bank Bhd. It didn't get involved in the kind of exotic financial derivatives and credit swaps that recently have gotten so many other, higher-profile lenders into trouble. It was dull, reliable Public Bank, the place where ordinary Malaysians went to deposit their loans and apply for mortgages or loans to buy a new car.

Fast forward to today, and Public Bank's slow-but-sure way of doing things is back in favor as it continues to expand its business in Malaysia's consumer sector. It ranked as Malaysia's overall most-admired company in the Asia 200 survey of subscribers of The Wall Street Journal Asia and other businesspeople.

The company moved up from third place in the prior survey, with survey respondents moving it ahead of Nestlé (Malaysia) Bhd., the overall most-admired company in the prior survey. Nestlé (Malaysia) took second place this time, while DiGi Telecommunications Sdn. Bhd. took third.
In the survey, the readers and business people ranked Public Bank No. 1 in two of the five categories they are polled on, and they ranked it second in two others, and third in the fifth. Its top scores came in the categories of "financial reputation" and "management's long-term vision."

Nestlé (Malaysia) took first in "good company reputation" and "high-quality services and products," while mobile-phone company DiGi took the top spot in the category of "innovation in responding to customers needs."

Stock analysts in Malaysia said Public Bank's 79-year-old founder and chairman, Teh Hong Piow, gets the basics of the business right. Instead of setting his sights on new ways of making -- and losing -- money, he continues to build Public Bank's business by taking deposits and handing out loans.

People familiar with how the bank operates said the publicity-shy Mr. Teh still oversees dozens of loan applications a week, exhibiting the same attention to detail that enabled this former bank clerk to climb the corporate hierarchy in Malaysia to become one the country's most-respected business leaders. Public Bank now has 242 Public Bank branches in its home market, and the group has an additional 97 overseas branches in Hong Kong, China, Cambodia, Vietnam, Laos and Sri Lanka.

Equity analysts said Public Bank's success is built on its strength among ordinary consumers, particularly in extending personal loans and loans for mortgages, and Mr. Teh has introduced minimum service standards to keep people flowing through its doors. Standards include a maximum waiting time of two minutes and a promise of a quick turnaround on loan applications.
It seems dull, but, according to analysts, it works. Since 2000, Public Bank's share of the consumer-banking market in Malaysia has expanded to 15% from 6%.

One of the few Malaysian banks not to post a loss during the 1990s Asian financial crisis, Public Bank also conscientiously avoided borrowing from other banks in order to expand its lending base -- a mistake that has led to the collapse of several banks elsewhere, especially in Britain. "Public Bank does the basics right and its entire brand is built on that," said a banking analyst at a rival bank who prefers not to be identified.

After growing up in Singapore and learning to make ends meet by, among other things, selling cigarettes to Japanese troops during World War II, Mr. Teh joined Overseas Chinese Banking Corp. as a clerk when he was 20 years old. He worked hard, needless to say, and rose to head up Malayan Bank's Kuala Lumpur office in 1960. After a few years of that, and buying and selling real estate on the side, Mr. Teh used his savings to found Public Bank in 1966.

Since then, Public Bank has made significant headway in Malaysia's large ethnic Chinese population, many of whom have appreciated the bank's straightforward approach to doing business. At the same time, Public Bank also began moving into other areas, namely Islamic banking, a field in which Malaysia is becoming a global hub. It also has maintained its strength in other niche markets, such as providing loans for cars by using automated approval processes.

In 2008, the bank expanded its net profit 22% to reach 2.58 billion ringgit ($723.9 million) despite the onset of the global financial crisis and a dramatic export slump in Malaysia, a major supplier of electronics components and raw materials such as palm oil. Total loans expanded by 19% during the same period, with consumer deposits climbing 17% from 2007.

Surprisingly, perhaps, its nonperforming loan ratio fell to 0.86% of total loans at the end of 2008 from 1.23% the year before.

To be sure, it hasn't been all easy sailing for Public Bank, not least because Malaysia's economy is facing a severe contraction and consumers are tightening their belts and delaying purchases of big-ticket items such as cars. Prime Minister Najib Razak recently released a new government forecast that projected the economy to contract by between 4% and 5% this year -- worse than the government's earlier forecast of a contraction of as much as 1%.

That pessimism is reflected in the Asia 200 survey, in which 17% of Malaysian respondents stated they would spend significantly less this year. Forty-seven percent said they would spend somewhat less, while 28% said there would be no change in their spending. Only 3.4% said they would spend somewhat more and 4.4% said they would spend significantly more.

The deteriorating Malaysian economy has led some analysts to suggest that Public Bank may choose to strengthen its capital base. CLSA Asia-Pacific Markets said in a report released in March that Public Bank's relatively "weak" capital in relation to other banks in the region could undermine its standing. "Compared with regional peers, it will be perceived as more vulnerable to economic shocks," CLSA said.

Other research houses, such as Kuala Lumpur-based OSK Research, have suggested that investors use concerns about the bank's ability to maintain dividend payments amid the difficult economic environment to load up on Public Bank stock. Public Bank officials have said they will continue making dividend payouts and expect loan growth of 15% in 2009.

More recently, the global environment has improved and the rate of decline in Malaysia has slowed.

The bigger long-term question, perhaps, is what will happen at the bank when Mr. Teh eventually decides to step down.

Mr. Teh has been at the helm of Public Bank for 45 years now. His deputy, managing director Tay Ah Lek, is 65 years old, and may not be willing to put in years more of additional service at his age. Some analysts have suggested that when that transition eventually comes, Public Bank could be ripe for a takeover or merger, especially as Mr. Teh's children have chosen to work elsewhere.

Analysts who follow Public Bank say Mr. Teh's succession plans remain under tight lock and key.