Public Bank - a bomb shelter in times of crisis

Public Bank Bhd's significant increase in the securities held-for-maturity is largely due to its purchase of risk free negotiable instruments of deposits (NIDs) and government papers over the last three months, say analysts.

They describe the purchase of the risk-free instruments as a safe means to increase liquidity in the system amidst an increasing risky business environment caused by the global credit crunch.

According to its financial results for the third quarter ended Sept 30, 2008 (3QFY08), the banking group had boosted its securities under the "held-to-maturity" portfolio in the balance sheet to RM9.9 billion from RM2.59 billion in just three months' time.

In its notes to the accounts accompanying its 3Q results, PBB's investments of Malaysian government securities (MGS) rose to RM2.5 billion from RM246.8 million as of June 30, 2008. The bank also beefed up the held-for-maturity portfolio by acquiring another RM4.73 billion worth of NIDs from other banking groups in the last quarter. As of Sept 30, 2008, it had RM5.05 billion worth of NIDs compared with RM318.68 million three months earlier.

The acquisitions were reflected in the banking group's net cash used in investing activities of RM7.34 billion, compared with RM987.6 million a year earlier.

A banking analyst from a local research house said PBB's move to increase its holdings in NIDs would enable the bank to gain fixed returns in the midst of economic volatility.

"The management already has the intention of acquiring more NIDs for some time. Acquiring NIDs from other banks are less risky than other types of investments and it is an option that banks can take to obtain returns from deposits acquired," she told The Edge Financial Daily here yesterday.

The analyst added that acquiring NIDs from other local banking groups was a safe move as confidence and trust among local banking groups were still strong, given that the local banking sector was generally insulated from the US credit crisis.

Aseambankers research analyst Wong Chew Hann said PBB's increased holdings of MGS were mainly due to lower bond prices at the time when the bond market was battered by soaring inflation.

"Public Bank probably saw the opportunity of investing in MGS when yields fell at that time, as they could purchase those bonds at lower price," she said.

She added that investments held under the held-to-maturity category served as safer hubs for banking groups currently, as they did not have to be marked-to-market, given that they were held for long term.

"This means there are less fluctuations in the bank's financial results," she said, adding that it was yet another prudent step made by the banking group to uphold its assets quality in view of current economic conditions.

Wong said although there was a revaluation loss of about RM10 million on PBB's trading derivatives, they were negligible compared with the banking group's asset size.

Effective 2005, Bank Negara Malaysia has required banks to classify their investment holdings under three categories - held for trading, available for sale and held to maturity under the "Guidelines on Financial Reporting for Licensed Institutions" (GP8).

The accounting treatment for these three categories varies. Available-for-sale and held-for-trading securities are measured at fair value or marked-to-market.

However, unlike available-for-sale, gains or losses from securities held-for-trading will be reflected in a bank's bottom line. Held-to-maturity securities are measured at amortised accreted cost using effective interest rates and are not required to be marked-to-market.

Although international accounting standards prohibit companies from re-classifying their investments, it is understood that Bank Negara Malaysia may allow banks to do so under special circumstances.

One example was AMMB Holdings Bhd, which underwent a portfolio-rebalancing exercise after its investment-banking arm's privatisation was completed early this year.