CHAPTER 1

1.1

1.2

INTRODUCTION

EXPLAIN DETAIL ABOUT YOUR TOPIC

BACKGROUND OF STUDY

EXPLAIN DETAIL ABOUT YOUR HYPOSESIS

STATEMENT OF PROBLEM

1.3

THE STUDY PURPOSELY ANSWER VARIOUS ISSUES

THEORETICAL FRAMEWORK

IT IS THE CONCEPTUAL MODEL OF HOW ONE THEORIZES OR MAKES

LOGICAL SENSE OF THE RELATIONSHIPS AMONG THE SEVERAL
FACTORS THAT HAVE BEEN IDENTIFIED AS IMPORTANT TO THE
PROBLEM.

1.4

OBJECTIVES OF STUDY

1.5

THE OBJECTIVES OF THE STUDY ARE MADE UP OF

i.

GENERAL OBJECTIVES

ii.

SPECIFIC OBJECTIVES

HYPOTHESIS

HYPOTHESES ARE FORMULATED TO TEST WHETHER OR NOT THE

CONJECTURED

RELATIONSHIPS

OR

DIFFERENCES

EXITS

AS

ESTABLISHED IN THE THEORETICAL FRAMEWORK FORMULATED FOR

THE RESEARCH STUDY.
1.6

SCOPE OF STUDY

1.7

LIMITATION OF STUDY

1.8

SIGNIFICANCE OF STUDY

CHAPTER 1

INTRODUCTION

1.0

INTRODUCTION
Banks are very important in contributing the development of financial system and

economy of a country. The profitability of banking industries will determine the financial
situation of a country. The poor performance shows by banking industry will slow down the
economy as a whole. When the others banking sector in other Asian countries suffering from
the financial crisis, banking sector in Malaysia also effected. Banking system in Malaysia
comprises of the commercial banks, investment bank, Islamic bank and foreign bank.
Banking system in Malaysia consists of Bank Negara Malaysia, banking institutions
and other financial institutions. In Malaysia, banking institutions consists of commercial
banks, merchant banks and finance companies whereas other financial institutions consist of
discount houses, foreign banks and offshore bank (Bank Negara Malaysia, 2001). Today,
Malaysia is implementing a dual banking system which Islamic banking system operating on
a parallel basis with the conventional banking system.
Commercial bank contributed 42% of the total asset in the financial system which
contributes the most. This is because commercial banks accept demand deposits from the
publics. The new evaluation of banks industry is facilitated with development advanced
technology that introduce customer with an easier and simpler methods daily. The banking
industry in Malaysia work under IBA Act (Islamic Banking Act) 1983, BAFIA Act (Banking
and Financial Institution Act) 1989 and CBMA Act (Central Bank of Malaysia) provides the
licensing and regulation of institutions.

1.1

BACKGROUND OF STUDY
Determinants of the bank performance become important issues that will help banks

understand the factors they should consider in decision making thus increase awareness
among the financial community. Retail banking or major commercial banks are the banking
institutions that execute transactions directly

with

customer. The

services

offers

by

commercial banks are saving and transaction accounts, mortgages, personal loan, credit and
debit cards and other services. The banks profitability will help increase the capital and loan
ratio. There are 8 major commercial bank (retail banking) in Malaysia such as Affin Bank
Berhad, Alliance Bank Berhad, AmBank Berhad, CIMB Bank Berhad, Hong Leong Bank
Berhad, Malayan Banking Berhad (Maybank), Public Bank Berhad, and RHB Bank Berhad.

Chart 1: Malaysia Interest Rate

Sources: Trading Economics, Bank Negara Malaysia

The most attractive element toward commercial bank is the interest rate offer. An
interest rate is the rate that paid by a borrower of money. Interest rate is expressed as an
annual percentage of the principal. Interest rate always related with investment, inflation and
unemployment. Interest rate charges as a result of inflation and Federal Reserve Board
3

policies. Low interest rate tends to have positive investment. Commercial banks make profit
through charging different interest rate from the borrowing and lending money operations.
Meaning that, commercial banks work by using capitalist system that based on interest rate.
Chart 1 shows the Malaysia interest rate. The decision on interest rate in Malaysia is
taken by Bank Negara Malaysia. Chart show that Malaysias average interest rate was 2.91%
from 2004 until 2010. This low interest rate offer by Malaysia indicates positive investment
made because low risk involved.
The size of the banks is measure in term of total asset owned by the bank. Assets are
used by businesses to generate income. Loans and securities are a bank's assets and are used
to provide most of a bank's income. The size structure refers to the distribution of market
share of different size of banks in the market. The bigger the size of the banks, the greater it
is. This is because the bigger they are, the harder for them to fall.

Table 2: Malaysian banks ranked by Asset size

Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15

Bank

Total Bank Assets (MYR, 000s)

Maybank
143,551,149
RHB Bank
68,387,971
Bumiputra-Commerce Bank
66,562,705
Public Bank
58,010,145
Citibank Berhad
36,887,645
Hong Leong Bank
36,778,941
EON Bank
31,640,882
HSBC Bank Malaysia
31,333,798
OCBC Bank (Malaysia)
28,100,046
United Overseas Bank (Malaysia)
26,917,482
Standard Chartered Bank Malaysia
26,233,948
Southern Bank
21,504,830
Affin Bank
21,137,968
AmBank
10,955,408
Bank Muamalat Malaysia
7,315,942
Sources: Bank Negara Malaysia 2006

Bank profitability depends on Return on Asset (ROA) that shows the ability to utilize
the banks financial and real investment. The ROA is calculated by dividing the net income
with the total assets. It reflects on how the bank manages the real investment resources to
generate profit. ROA measures a banks earnings in relation to the resources that they had
disposal that is shareholders capital plus short and long-term borrowed funds. Therefore, this
method is the most popular method in order to calculate the shareholder return. ROA used for
making performance comparison in the banking institution. This is because their assets will
carry the value of the actual market value.
Capitalization of the bank is measure in term of Return on Equity (ROE) that has
relationship with technical and cost efficiency. ROE measures the rate of return on the
shareholders equity. ROE shows how well a company uses their investment to generate
earnings growth that is measures a firms efficiency at generating profit from every unit of
shareholders equity. Well capitalized means bank tend to be more efficient as their safety
improve. It is an important variable to determine the bank profitability as a ratio that represent
the capital requirement and proxy for risk and the regulatory cost.
A bank expense is measure by the proportion of operating expense to total assets.
Operating expense consists of salaries paid to employees, research and development costs,
legal fees, accountant fees, bank charges, office supplies, electricity bills, business licenses,
and more. The biggest challenge to controlling operating expenses is a risk known as agency
cost. It is the inherent conflict between owners and managers. You'll also find that some

companies purposely chose to run higher expense ratios than their competitors. One major,
well-known bank makes an intentional choice to run 10% to 15% higher operating expenses,
and thus lower profit margins, to keep the branches fully staffed. They believe that by making
banking as convenient as possible and avoiding long lines, the improved customer service will
cause more of their clients to keep a larger portion of their household's accounts with them

1.2

STATEMENT OF PROBLEM
Performance of banking institutions will effect the economic growth of a country. The

services provided by banking institution will help in development of the economic. Due to
this statement, this study is purposely to answer the following issues:
1.

How are the performances of conventional commercial bank in Malaysia?

2.

What are the determinants of the performance of conventional commercial bank in

Malaysia?

3.

Is there any effect on external factors such as bank size, profitability, capitalization and
bank expenses toward performance of conventional commercial bank in Malaysia?

4.

1.3

How far the effect will influence the growth of economic?

THEORETICAL FRAMEWORK

A theoretical framework is a conceptual model of how one theorizes or makes logical

sense of the relationships among the several factors that have been identified as important to
the problem. These relationships can be depicted as in Figure 1.

Figure 1: Theoretical framework among the variables that determine the performance of retail
banking
.
Interest Rate

Size of bank

Market Share

DETERMINATION OF
RETAIL BANKING
PERFORMANCE

Total Expenditure

Fund Invested

GDP growth

Liquidity

Funds Deposited in
Current Account

Total Capital and

Reserve

Inflation

Sources: Determinants of Bank Profitability (Anna P.I Vong and Hoi Si Chan, 2005)

There are various variables that might also determine the performance of commercial
banks such as return on asset, return on equity, total capital, technology innovation, stock
market variable and many other beside interest rate, inflation rate and GDP growth.
This study only determines the relationship of the above four variables in influence the
performance of major commercial bank. To determine this, the four independent variables;

bank size, profitability, capitalization and bank expenses are tested against the dependent
variable, which is the performance of conventional commercial banks.
There are various theories that can be applied in this research such as consumer choice
theory, consumer behavior theory, profit theory and investment theory. In the Modern
Portfolio theory (MPT), is a theory of investment that describe a concept of diversification in
investing within the aim of selecting a collection of investment assets that has collectively
lower risk than any individual asset. This is possible can be seen intuitively because different
types of assets often change in value in opposite ways. A collection of both types asset can
have lower overall risk than either individually. But diversification lowers risk even if assets
returns are not negatively correlated indeed, even if they are positively correlated. MPT model
an assets return as a normally distributed, defines risk as standard deviation of return, and
models a portfolio as a weighted combination of assets so that the return of a portfolio is the
weighted combination of the assets return. In crises situation, the correlations between asset
classes are not fixed but can vary depending on external events. Furthermore, there is growing
evidence that investors are not rational and markets are not efficient.
In finance, the capital asset pricing model (CAMP) is used to determine a theoretically
appropriate required rate of return of an asset. The model takes into account that the asset
sensitive to non diversifiable risk often represent by the quantity beta in the financial industry
as well as the expected return of the market and the expected return of a theoretical risk fee
asset.
Profit is the compensation received by a firm for its managerial function. Classical
economists have regarded profit maximization as an objective of the business in the capitalist
economy. In practice, banks rarely seek to maximize profits. According to Hawleys

(1989)

regarding the risk theory of profit, the riskier the industry the higher its profit rate. Since
banks take the risks of business, they are entitled to receive profit as their rewards. Meaning

that, profit is commensurate with risk. Profit is not based on banks ability to undertake risks
but their capability to avoid risk. This theory concern on risk only and disregards other
factors. According to dynamic theory by Clarks (1999), profit is the difference between
selling price and the cost resulting in the changes in demand and supply condition. Profit is
the surplus over cost. The changes of profit because of change in population change in taste
and preferences, capital formation and technological advancement. All the dynamic changes
lead to profit but only unpredictable changes may increase the profit. Therefore, Clarks
theory is not stress on the element of risk because of dynamic changes.
Both theory support by F. H. Knight (1885-1972) significantly integrated and extended
prior theories of profit by combining in one theory the factors of risk, managerial ability, and
economic change. In Risk, Uncertainty, and Profit, Knight distinguished between risks
businesses take that can be insured against and risks for which no insurance is available. A
firm, for example, may lose its plant through fire, but actuarial knowledge permits this risk to
be covered by insurance. The insurance premium becomes a part of the firm's costs. This kind
of risk is therefore not a source of profit. Profits exist because there are uncertainties in the
market that are not insurable. These arise from dynamic changes in the market. However, if
we drop the assumption of perfect competition, profits may arise for a number of reasons, the
most important being monopoly or monopsony power. Therefore, many theory can be apply
in this research in order to prove that there are many factors determinant the performance of
conversional commercial banks.

1.4

OBJECTIVES OF STUDY
The objectives of this study are made up of general objective and specific objectives as

follows:-

1.4.1

General Objective
The general objective of this research is to determine the performance of
commercial banks in term of bank size, profitability, capitalization and bank
expenses in Malaysia

1.4.2

Specific Objectives
1.4.2.1 To analyze and determine the factors that influences the performance
of commercial banks.
1.4.2.2 To identify the relationship between bank size, profitability,
capitalization and bank expenses and performance of commercial
banks.

The finding of this study will indicate whether the above factors have determined the
performance of commercial bank among 8 major commercial banks in Malaysia. Specifically,
the study will attempt to answer the following questions.

10

1.5

HYPOTHESIS
The following hypotheses are formulated to test whether or not the conjectured

relationships or differences exist as established in the theoretical framework formulated for

this research study.

1.5.1

Hypothesis 1:

Banks size measure in term of total asset of the bank.

Ho

There is no significant effect of bank size on the determinant of

commercial bank performance in Malaysia

H1

There is significant effect of bank size on the determinant of commercial

bank performance in Malaysia

1.5.2

Hypothesis 2:

Profitability is the ability to utilize the financial of bank and investment resources in
order to create profit. Profitability is measure in term of return on asset (ROA)
Ho

There is no significant effect of profitability on the determinant of

commercial bank performance in Malaysia

H1

There is significant effect of profitability on the determinant of

commercial bank performance in Malaysia

11

1.5.3

Hypothesis 3:

Capitalization is the efficient bank that gain high profit will strengthen their
capitalization status. The efficient bank will use more equity compare to their
competitors. Capitalization is measure in term of return on equity (ROE)

Ho

There is no significant effect of capitalization on the determinant of

commercial bank performance in Malaysia

H1

There is significant effect of capitalization on the determinant of

commercial bank performance in Malaysia

1.5.4

Hypothesis 4:

Bank expenses measure in term of operating expenses toward total asset.

Ho

There is no significant effect of bank expenses on the determinant of

commercial bank performance in Malaysia

H1

There is significant effect of bank expenses on the determinant of

commercial bank performance in Malaysia

12

1.6

SCOPE OF STUDY

The scope of this study will be limited to conventional commercial banks.

There are eight chosen registered banks were selected, namely:

1.6.1

Affin Bank Berhad

1.6.2

Alliance Bank Berhad

1.6.3

CIMB Bank Berhad

1.6.4

Hong Leong Bank Berhad

1.6.5

Malayan Banking Berhad (Maybank)

1.6.6

Public Bank Berhad

1.6.7

AmBank Berhad

1.6.8

RHB Bank Berhad

13

1.7

DETAIL OF POPULATION

1.7.1 Affin Bank Berhad

Affin Bank Berhad (AFFINBANK) is a wholly-owned subsidiary of Affin
Holdings Berhad which is listed on Bursa Malaysia. The Bank serves both retail and
corporate customers. The business units of the Bank comprise Enterprise Banking,
Consumer Banking, Debt and Capital Markets and Hire Purchase. Consumer Banking
provides credit cards, personal loans, mortgages and deposit taking services to
individuals. The bank offers corporations, institutional clients and SMEs services in
corporate banking, contract financing and trade finance. Enterprise Banking serves as
an important feeder to the other business units by way of contacts and opportunities.
1.7.2 Alliance Bank Berhad
Bank is a community based financial institution in its 73rd year of continuous
serving the Philadelphia Metropolitan area through nine full service offices. Alliance
is a wholly owned subsidiary of Alliance Bancorp, Inc. of Pennsylvania. Alliance
Bancorp is a public company traded on the NASDAQ Global Market under the
symbol "ALLB". The bank also participates in various loan programs and seeks
opportunities to invest in the people, organizations and small businesses in the
communities we serve.

14

1.7.3

CIMB Bank Berhad

CIMB Group is a regional universal bank operating in high growth economies

ASEAN. CIMB Group has the widest retail branch network across the region and is an
indigenous ASEAN investment bank. CIMB operate across ASEAN under several
corporate entities, which include CIMB Investment Bank, CIMB Bank, CIMB
Islamic, CIMB Niaga, CIMB Securities International and CIMB Thai. CIMB Groups
multi-local business model is organised primarily across the following areas:
Consumer Banking, Corporate & Institutional Banking & Markets and Group Asset
Management, Insurance & Takaful. CIMB Islamic operates in parallel with these
businesses, in line with CIMB Groups dual banking model.

1.7.4

Hong Leong Bank Berhad

Hong Leong Bank Berhad ("Hong Leong Bank" or "Bank"), a public listed

company on Bursa Malaysia, is a member of the Hong Leong Group Malaysia ("the
Group"). Headquartered in Malaysia, the Group has been in the financial services
industry since 1968 through Hong Leong Finance Berhad and since 1982 through Dao
Heng Bank Ltd. in Hong Kong. Dao Heng Bank Ltd. has since been sold to another
institution. In 2011, Hong Leong Bank completed the merger with EON Bank Group.
The merger effectively transforms the Bank into a banking group of more than RM145
billion in assets and an expanded network of 329 branches nationwide. Hong Leong
Group Malaysia is one of the largest business groups in Malaysia and internationally.
Through its financial services arm Hong Leong Financial Group Berhad, which
consists of Hong Leong Bank, Hong Leong Islamic Bank, Hong Leong Bank Vietnam,
Hong Leong Assurance and Hong Leong Tokio Marine Takaful, the Group is well
positioned as an integrated financial services provider.
15

1.7.5

Malayan Banking Berhad (Maybank)

Maybank, a trade name for Malayan Banking Berhad is the largest bank and

financial group in Malaysia, with significant banking operations in Singapore,

Indonesia and the Philippines. The bank also has large interests in Islamic banking
through Maybank Islamic Berhad and insurance via its Etiqa subsidiary. Maybank is
the largest bank in Malaysia with 384 domestic branches and 190 international
branches and offices. Maybank is largest listed companies on the Malaysian Stock
Exchange, Bursa Malaysia, with a market capitalisation of over RM54 billion (USD22
billion) as of end-March 2011.

1.7.6

Public Bank Berhad

Public Bank (Hong Kong) Limited (Public Bank (Hong Kong)) is a

commercial bank registered under the Banking Ordinance of Hong Kong. Public Bank
(Hong Kong) was formerly known as Asia Commercial Bank (ACB) and was
incorporated in 1934. In May 2006, Public Bank Berhad (Public Bank) of Malaysia,
through its subsidiary, Public Financial Holdings Limited (Public Financial),
acquired 100% interest in ACB and subsequently changed its name to Public Bank
(Hong Kong) Limited in June 2006 to reflect its association with Public Bank. The
shares of Public Financial are listed on The Stock Exchange of Hong Kong Limited,
and the shares of Public Bank are listed on Bursa Malaysia Securities Berhad.

1.7.7

AmBank Berhad

AMMB Holdings (which trades as AmBank Group) is currently the fifth

largest banking group in Malaysia, with more than 200 branches and their outlets
(including subsidiaries and associates), providing individuals and businesses with a
16

range of financial services and products. AmBank Group

was founded in 1975 as

Arab-Malaysian Development Bank, by Merchant Banking pioneer, Hussain Najadi

his Holding company AIAK (Arab Investments for Asia Kuwait). He brought the
bank public via the Kuala Lumpur Stock Exchange (KLSE) in 1981. Tan Sri Azman
Hashim, the chairman, controls about one-third of AMMB Holdings. In 2006,
interest in AMMB was reduced to 18.8% from 32.9% after the Tan Sri Azman sold
300 million shares to ANZ Group.
1.7.8

RHB Bank Berhad

RHB Bank Berhad (also known as the Rashid Hussein Bank) is a bank based
in Kuala Lumpur, Malaysia. It specializes in commercial banking, corporate and
investment banking and international banking services. The bank was formed after a
merger between Kwong Yik Bank and DCB Bank (Development and Commercial
Bank, also formerly known as D&C Bank), on July 1, 1997, and Sime Bank and Bank
Utama later. On March 9, 2007, the Employees Provident Fund (EPF) gained control
of the bank, after winning a bid against EON Capital and a Kuwait Finance House that
led RHB Bank is a part of RHB Capital Berhad financial conglomerate.

17

1.8

LIMITATION OF STUDY
The following are the limitation of the topic under study:
1.8.1

Availability of data
This is due to the fact that these studies only focus on conventional commercial
banks, not including the other banking sector. Therefore, the findings cannot be
generalized to the other sources of banking sector as it may not represent and
depicted the overall factors determine the performance of banking industry.

1.8.2

Variables
The selection of variables used in this study may not provide the desired result,
as there are many factors besides bank size, profitability, capitalization and
bank expenses that would determine the performance of retail banking.

1.8.3

Sample size
The size of sample was limited to 8 major commercial banks only. The sample
size may not represent the whole market.

1.8.4

Time
The research is only done within a time frame work given. If further more time
given, this research may represent the overall factors that might determine the
performance of all types of banking sectors.

1.9

SIGNIFICANCE OF STUDY

18

1.9.1

The Researchers
This study will serve as a guideline to the other researchers who are interested
to explore the possibility of future research on banking industries.
Furthermore it will also provide some updated evidence on the performance of
retail banking.

1.9.2

The Investors
This study will also provide additional information to investors to allow them
to make more educated investment decisions. It is hoped that investors would
benefit from a greater understanding and awareness of the importance of other
factors besides bank size, profitability, capitalization and bank expenses that
determine their investment strategy.

1.9.3

The Bankers
This study will seek to provide more recent evidence on the market trend of
banking sectors. Thus it will help them to forecast the upcoming performance
of the banking sectors in making a more strategic investment decision.

19