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PERFORMANCE AND SIZE: EMPIRICAL EVIDENCE FROM PUBLIC BANK

BERHAD

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 PERFORMANCE AND SIZE: EMPIRICAL EVIDENCE FROM PUBLIC

BANK BERHAD

Fatin Nabilah Rosli

Universiti Utara Malaysia

ABSTRACT

The aim of this paper research is to explore the relationship of risk and the bank

performance of Public Bank Berhad, Malaysia in 5 years trend starting 2011 until

2015. This paper finds the type of indicator that being used as measuring the bank

performance to be analyst and knows their strengths and weakness . Not only that, by

overlooked their total asset, it shows how good their been manage to assure the total

asset being increase year by year as to achieve their target. In finding, states that the

best variable in measuring the profitability and efficiency of the banks is Return On

Assets (ROA). The highest percentage reflects the good sign in bank performance.

Moreover, result show that there are negative relationship between the operational

risk and ROA and positive relationship with the leverage, GDP, liquidity risk, credit

risk, and inflation rate

Keywords: Operational risk, ROA, Credit risk, Liquidity risk, GDP, Inflation rate

1
1.0 INTRODUCTION

The sector that being as the backbone of economy is the banking sector. It is because

the bank’s performance can gain influence from others sector.

General knows, Public Bank Berhad involve in the commercial banking and been

related with financial services. The business segments that been operates by Public

Bank Berhad are Hire Purchase and Retail Operations. The Hire Purchase segments

relate of supply vehicle financing while Retail Operations segments offer SME loan,

residential, and personal loans.

In year 1966, the Public Bank Berhad began their journey when been established by

its Founder and Chairman, Tan Sri Dato’ Sri Dr. Teh Hong Piow. He began his

banking career in 1950 and has 66 years’s experience in the banking and finance

industry. He is as non-independent non- executive chairman.

Next, Tan Sri Dato’ Sri Tay Ah Lek,73 years old, has 55 years experience in the

banking and finance industry. He is the Chief Executive Officer (CEO). He holds a

Master’s degree in Business Administration from Henley, United Kingdom.

In addition, Dato’ Sri Lee Kong Lam, aged 74 years old and been experience in the

banking and finance industry almost 48 years. In 1 September 2015, he was appointed

as Non-Independent Non-Executive Deputy Chairman. Beside that, the headquartered

of Public Bank Berhad is in Kuala Lumpur, Malaysia.

In year 2016, Public Bank has been enters into 50th year of operations. With five

decades of sustainable growth, the Public Bank Group serves the financial needs of

over nine million customers from all generation life in Malaysia and in other countries

in the group have been operates by more than 18000 staff.

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In year 2011 the total asset is RM 249.41 billion. It has the increasing about 10.2%

compare to previous year. In year 2012 the total asset is RM274.62 and it is about 9.6%

increase. Next, in year 2013 the total assets is RM305.73 and has increasing regarding

the previous one about 11.2%. In addition, in year 2014 the total assets is about RM

345.72 and it has made a increasing about 13.1%. In year 2015, the total assets is

increase 5.2% compare to previous where it is about RM363.76 billion. The

efficiency of banks affect from the size assets. At the end of 2015, Public Bank is the

third largest banking group in Malaysia with an assets of RM363.76 billion.

Public Bank is the best asset quality compare to others Malaysian banking groups.

Moreover, their corporate mission is to maintain the position of being the most

effective, beneficial and regarded head monetary foundation in Malaysia.

3
2.0 LITERATURE REVIEW

General known, activities from lending and financing have being incomes to bank as

it being generates as well. According Waemustafa and Sukri (2016) state that,

depositor’s money which is paid by interest income have been generated from

financing and loans being as the most of their assets are being funded from.

Soundness of bank will be affected if any wrongly match between assets and liability.

According Kyriaki and Constantin (2008) state that, in the new monetary and

financial environment, one of the major issues is the efficiency of the banking system.

Not only that, also state that efficiency of banks been affects due to the size. Based on

Peterson and Rajan, 1995; Hardy and Simigiannis, 1998 been proved that large banks

will survive in this new competitive environment while for the small banks will be

survive only if they particularized of their activities. The study by Miller and Noulas

(1996) state that the higher levels of technical efficiency, the larger and more

profitable banks have. This technical efficiency have been examined by them.

According Yee, Woon, Jia, Angie and Sing (2012 ) state that tools of bank

performance has been measure by using of return on assets (ROA). ROA is the best

tools to be measure how the bank have been fully utilized use its assets to generate the

profit. The formula of ROA is total net income over total asset. It been measure when,

the higher the ROA ratio, the higher the bank profitability is. There are been

categorized of the determinations of bank’s profitability into bank-specific (internal

factors)and macroeconomic factors (external factors).

Based on Abubakar (2015) said that bank institution have to consider leverage as

an significant financing decision that will work as their capital structure.

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To measure a bank’s financial leverage, total debt to equity has been using. The

formula of leverage is a bank’s total liabilities divide stockholder’s equity.

The banks that exposed more high risk has been represented by higher debt over

equity because of heavily involving debt to finance bank’s growth. According Andy,

Chuck & Alison (2002) said that when depositors deposit their money into bank, the

bank required to pay the interest to depositors.

Referring to Kosmidou, Tanna and Pasiouras (n.d) said that the main factor that

affected the country’s economic growth is the effectiveness of financial

intermediation. Meanwhile, to generate the systemic crises that contracting effect of

the economy, bank liquidity does it. So that, to ensure the bank is soundness and

safety in financial system, the banking institution should keep higher of profit.

According Abdul Jamal, Abdul Karim and Hamidi state that the bank is operating in a

stable profitability is representing that a banking sector is in steady level of.

Furthermore, the ability that banks have to create or make the public trust to potency

depositors, shareholders and stakeholders is to make the bank stay competitive in

financial market by keeping up a soundly profit.

According Kupiec and Lee (2012) said that the important role in measure the

bank performance is by using return on assets (ROA). According studies that done by

Obamuyi (2013) and Javaid, Anwar, Zaman and Gafoor (2011) state that ROA is

more relevant to be measured compare the ROE that overlooked the financial leverage.

Based on article Waemustafa and Abdullah (2015) state that Shariah Supervisory

Board (SBB) and mode of financing that adopted by Islamic bank is positive

relationship. Meanwhile, Shariah Supervisory Board (SBB) remuneration and mode

financing adopted by the Islamic bank have no significant relationship among them.

5
 In addition, based on article Waemustafa and Sukri (2015) ;Kolapo (2012) and

Kithinji (2010) said that, there are many reasons of credit risk include, lack of

management, low capital and liquidity risk,poor lending practice,and lack knowledge

about borrowers.

According Waemustafa and Sukri (2015) state the portfolio must be well

-diversified, well risk management, and right strategies that will conventional bank to

mitigate their credit risk even though have larger size of assets. Beside that, study

shows there is negatively influenced between conventional risk taking behavior by

level of liquidity. In article Waemustafa and Sukri (2015) state that the higher

liquidity, the lower credit risk exposure and shows that the finding is consistent to

Cornett (2011) who state his opinion that when risk is high exposure to banks it will

have more cash and other liquid asset where it also can reduce make new loans which

can compared to low liquidity risk during banking crisis. Beside that, Waemustafa

(2015) said that the interest based is liquid assets of conventional banks. When

improve liquidity, customer will get service their loans and also can give lower credit

risk to banks.

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3.0 DESCRIPTIVE ANALYSIS

MARKET RISK
GDP ROA INFLATION

0
2011 2012 2013 2014 2015
GDP 5.3 5.5 4.7 6 5
ROA 1.46 1.48 1.4 1.39 1.43
INFLATION 3.17 1.66 2.1 3.14 2.1

Figure 3.1

After financial crisis in 1997, Malaysia managed to straighten out their banking

sectors in efficient way through merging and acquisition in industry banking.

Banks will perform better and become more capable to through negative shocks is

when banks achieve greater banking performance. Moreover, banks who have lower

risk of banking insolvency is bank who have greater banking performance when the

economic is downturn.

From the figure 3.1 show that the market risk that include of GDP, ROA,

inflation from year 2011 until 2015.Gross domestic product (GDP) acts as a

measuring total income in the economy. Not only that, GDP also measures total

7
expenditure on the economy’s output of goods and services. The GDP trend shows the

most higher is in year 2014 which is 6% while the lowest is in year 2013 which is

4.7%. In year 2011 the GDP is 5.3% and have been increasing about 0.2% (5.5%) in

year 2012. Meanwhile, for year 2015, GDP state that 5%, which it is decrease from

the previous year. For GDP in area of Public Bank Berhad shows that in year 2014 is

the best gaining by moving forward the profit as the GDP is the highest (6%)

ROA being as the indicator of measuring of bank’s performance and the financial

regulators. It also a useful statistic in comparison the profitability of banks. The

formula of ROA is the total net income over total assets. Not only that, ROA also to

indicate how efficiency and effectively the banks manage their assets. The higher the

ratio the better the performance of the bank. Good protections against the risk failure

is when it has the strong return on asset. For the trend analysis of ROA, it shows that

the the highest is in year 2012 which about 1.48% and the lowest is in year 2014

which is 1.39%. In year 2011, ROA increase about 0.2% from 1.46% to 1.48%.

Meanwhile, the next year was suddenly boom decline from 1.48% to 1.4% (2013)

and keep decline in year 2014 with 1.39% only. In year 2015 it make the increasing

about 1.43%. which is means every 1 dollar of income will get 1.43 profit.

Meanwhile, inflation terms is a generally measured in the increase of economy prices.

For the trend analysis, the higher inflation is in year 2011 which is 3.17% and it been

drastic decline in the next year (2012) with 1.66%. It is gives the good result in Public

Bank Berhad sector as the inflation is decrease. As can see, it have indirectly

relationship between ROA and inflation. It is because, when the ROA is achieve the

higher trend, the inflation been in the lowest trend. Next, in year 2013 and 2015 had

been state the same ratio which is 2.1%. In year 2014, it been state the ratio is 3.14%

which it been increase vigorously from the previous year.

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 RISK ANALYSIS
CR LR OR
80.00%
69.81%
70.00% 65.16%
64.17%
60.50% 61.90%
60.00%

50.00%

40.00%

30.00%

20.00%
11.14% 9.75% 10.34%
10.00% 5.78% 4.39%
0.90% 0.62% 0.62% 0.57% 0.45%
0.00%
2011 2012 2013 2014 2015

Figure 3.2

Figure 3.2 shows that the analysis risk from year 2011 until 2015. From the above

graph, for the credit risk,the highest ratio is in year 2011 with 0.9% while the lowest

in year 2015 with 0.45%. It shows that the good improvement that been show in

Public Bank group regarding their management in credit risks. As we know that, for

credit risk, the lowest the ratio, the good of the credit risk management. It also shows

the increasing ratio from 0.9% in year 2011 and up to 0.45% in year 2015.

Next is liquidity risk. Liquidity risk is where the risk that sufficient cash flows

will not be available to meet the bank’s financial commitments at some point in time.

The importance of liquidity exceeds the individual bank, since liquidity shortfall at a

single institution can have system wide repercussions. From the graph above show

that, the highest ratio is in year 2011 with 11.14% and the lowest is in year 2015 with

9
4.39%. Meanwhile, in year 2012, 2013 and 2014 are ratio with 9.75%, 10.34% and

5.78% respectively. As from the result, the lowest ratio show the good performance as

mean Public Bank Berhad been manage the current assets well.

For the operational risk, the 5 years trend look similar each years. The highest

ratio is in year 2015 with ratio 69.81% and the lowest is in year 2011 with ratio

60.50%. About the remaining years, which are in 2012, 2013 and 2014 shows the

slightly increase year by year which are 61.90%, 64.17% and 65.16% respectively.

The Public Bank Berhad have difficulty by being the high operational risk as it is not

good reflect to the bank’s performance. This is because operational risk is being lead

to the risk of losses in result of form of inadequate or failed internal system, and

external factor or humans factor.

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4.0 DISCUSSION AND RECOMMENDATIONS

4.1 DISCUSSION

Descriptive Statistics

Mean Std. Deviation N

ROA .0150887273080 .00137976799530 5

AUDIT REMU 3170.60 624.886 5

ROE .190440 .0406986 5

LEVERAGE 11.50296728580 1.623234994347 5

GDP .05300 .004950 5

LR .072340 .0205117 5

CR .006140 .0012280 5

OR .643120 .0358069 5

INFLATION RATE .02440 .006693 5

Table 4.1

Table 4.1, shows the descriptive statistics of Public Bank which include all the

variables as a measurement. The data summaries the value of mean and standard

deviation of each nine variables and N represent the data of 5 years bank of Public

Bank.

From the above result, the mean score of return on assets for Public Bank

is .0150887273080 (1.5%) with the standard deviation of .00137976799530 (0.13%).

Return on equity is higher than return on assets which of .190440 (19%) the value of

mean and the standard deviation is .0406986 (4.1%). Return on assets (ROA) and

11
 return on equity(ROE) were the best variable in measuring the profitability and

efficiency of the banks. The highest percentage reflects the good sign in bank

performance. For the variable of audit remuneration is 3170.60 for the mean and

624.886 for the standard deviation. In leverage variable, the mean is 11.50296728580

and the standard deviation is .623234994347. The variable of GDP state that the

mean .05300 (5.3%) while the standard deviation is .004950 (0.4%). Beside that, for

variable of liquidity risk, the mean is .072340 (7.2%) and the standard deviation

is .0205117 (2.05%). In addition, the mean for credit risk state that .006140 (0.6%)

and the standard deviation is .0012280 (0.1%). Beside that, the mean for operational

risk is .643120 (64.3%) and the standard deviation is .0358069 (35.8%).

Correlations

INFLAT
AUDIT
ROA ROE LEVERAGE GDP LR CR OR ION
REMU
RATE
ROA 1 0.895 0.965 0.876 0.084 0.855 0.846 -0.912 0.062
AUDI
T
0.895 1 0.877 0.821 0.062 0.773 0.573 -0.799 -0.327
REM
U
ROE 0.965 0.877 1 0.971 -0.093 0.957 0.874 -0.932 0.009
LEVE
Pearso RAG 0.876 0.821 0.971 1 -0.233 0.991 0.839 -0.899 -0.055
n E
Correla GDP 0.084 0.062 -0.093 -0.233 1 -0.168 0.053 -0.204 0.468
tion
LR 0.855 0.773 0.957 0.991 -0.168 1 0.879 -0.927 0.054
CR 0.846 0.573 0.874 0.839 0.053 0.879 1 -0.915 0.481
-0.91
OR -0.912 -0.799 -0.932 -0.899 -0.204 -0.927 1 -0.248
5
INFL
ATIO
0.062 -0.327 0.009 -0.055 0.468 0.054 0.481 -0.248 1
N
RATE

Table 4.2

From the above table 4.2 shows that correlation matrix result from year 2011 until

2015 shown that the dependent variable return on asset (ROA) has the negative

relation with the operational risk with the coefficient estimate of -0.912. According

12
Kupiec and Lee (2012) said that the important role in measure the bank performance

is by using return on assets (ROA). So that the dependent variable that been use is

return on asset (ROA).

In contrast, return on equity (ROE) and leverage has the positively relationship

with ROA with amount of 0.965 and 0.876 respectively. It shows that Public Bank

Berhad have been manage well their profit in that particular 5 years. In addition, GDP

and inflation rate is also positively relationship with amount 0.084 and 0.062

respectively. Beside that, for the relationship between liquidity risk and ROA it also

show positive relationship with coefficient estimate 0.855.

4.2 RECOMMENDATIONS

This study focused on the result of risk and bank performance of Public Bank Berhad.

The study have been gain the data by collecting the information in the annual report

from years 2011 until 2015. The recommendations for the next research is the

institutions should more focus on the corporate governance elements. The pillars of

corporate governance elements are accountability, fairness, transparency, independent.

All this elements should be practices as it will be more focus on management. Even

though this elements have been implement, it must be more seriously concern as it is

been influence the bank’s performance.

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5.0 CONCLUSION

This study was conducted to explore the relationship between risk and bank

performance over 5 years starting in years 2011 until 2015. For purpose of this study,

bank’s performance had been highlighted. This study used return on asset (ROA) as

the dependent variable to represent the Public Bank Berhad profitability and have nine

variables to major the bank’s profitability. The independent variables are credit risk,

liquidity risk, operational risk, ROE, GDP and inflation had been be measure. The

positive relationship are between ROE, leverage, GDP, liquidity risk, credit risk, and

inflation rate while it is negative relationship between operational risk with ROA.

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 REFERENCES

Lee, Y. J., Hwang, M. Y., Ko, L. W., Ong, A., & Wan, K. S. (2016). The
Bank-Specific and Macroeconomic Factors That Affect Domestic Commercial
Banks Performance in Malaysia (Doctoral dissertation, UTAR).

Rengasamy, D. (2014, December). Impact of Loan Deposit Ratio (LDR) on

Profitability: Panel Evidence from Commercial Banks in Malaysia.
In Proceedings of the Third International Conference on Global Business,
Economics, Finance and Social Sciences (GB14Mumbai Conference) Mumbai,
India (pp. 19-21).

Waemustafa, W., & Sukri, S. (2016). Systematic and Unsystematic Risk Determinants
of Liquidity Risk Between Islamic and Conventional Banks. International
Journal of Economics and Financial Issues, 6(4).

Waemustafa, W., & Sukri, S. (2015). Bank specific and macroeconomics dynamic
determinants of credit risk in Islamic banks and conventional banks. International
Journal of Economics and Financial Issues, 5(2).

Waemustafa, W.,& Abdullah, A.(2015).Mode of Islamic Bank Financing: Does

Effectiveness of Shari’ah Supervisory Board Matter?.

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