A) BACKGROUND

1. Local Bank-Maybank

Malayan Banking Berhad (Maybank) is the largest bank in Malaysia and also the largest

company on the exchange. It is the first bank to introduce online banking in Malaysia in year

2000 and the first bank to introduce a Smart TV application in Singapore in year 2012. It has

also launched Malaysias first wireless mobile payment terminal facility in year 2009.

Maybank found by Malaysian business tycoon, Mr. Khoo Teck Puat who was ranked as the

108th richest person in the world and his partners in year 1960.

Maybanks home market are Malaysia, Singapore and Indonesia. It has a combined

branch network of 1,156 offices in ASEAN with 43,976 employees. Its head office is located

at Kuala Lumpur, Malaysia whereby the other banking subsidiaries are located in Brunei,

Indonesia, Singapore, Cambodia, Vietnam, Philippines, Laos, and Myanmar. The services

offered by Maybank included current account, saving account, fixed deposits, internet banking,

business and housing loan, remittance, trade finance, share margin financing, and also Islamic

financing. Maybank is now a Top 5 financial services group in ASEAN.

In year 2015, Maybank carried out an inaugural programme named Maybank

Fintech. FinTech is the short form of financial technology. The purpose of this programme is

to brainstorming ideas and introduce the technology innovation using in financial sector. This

inaugural programme attracted almost 100 companies from different geographies in year 2015

and 2016. In year 2016, Maybank launched Malaysias first mobile wallet payment application

which called MaybankPay and it was also cooperate with Samsung to roll out SamsungPay

mobile wallet application in Malaysia and Singapore. Despite of mobile wallet payment

application, Maybank online banking-Maybank2U has also been widely used by people. It had

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processed RM285 billion in transaction value while 60% of it was processed through mobile

phone platform.

2. Foreign Bank-UOB

United Overseas Bank Limited (UOB), previously named United Chinese Bank

(UCB), is a regional banking organization in Asia. It is also the third largest bank in Southeast

Asia by total assets which was found by Datuk Wee Kheng Chiang and his partners in year

1935. UOB has more than 500 branches and offices in 19 countries and territories in Asia

Pacific, Europe and North America. Its head office is located in Singapore whereby the other

banking subsidiaries are located in China, Indonesia, Malaysia and Thailand, as well as

branches and offices. The financial services provided by UOB globally through three business

segments which are group retail, group wholesale banking, and global markets and investment

management. UOBs offering are Corporate and Commercial Banking Services which included

machinery and equipment financing, commercial and industrial property financing, working

capital financing, structured trade and commodity financing, and also project and specialized

financing. Besides, Investment Banking and Treasury Services, Transaction Banking Services,

and Personal Wealth Management are also provided by UOB. UOB is rated among the worlds

top banks: Aa1 by Moodys and AA- by Standard & Poors and Fitch Ratings. It was also

rated AAA by the Rating Agency of Malaysia.

In year 2015, UOB received Distinguished Patron of the Arts Award for 11th

consecutive year and SG50 Arts Patron Award. This is definitely an affirmation for the good

performance of UOB. Besides, UOB has also introduced the first mobile apps outside of the

US to enable contactless payment with tokenized security in the same year. Other than that,

UOB has completed full acquisition of Far Eastern Bank and it has officially added Yangon

Branch into UOBs unparalleled Southeast Asia network. While in year 2016, UOB was voted

as the Best Foreign Cash Management Bank in Malaysia by small, medium, and large sized

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 corporates. Besides, UOB was also awarded as the Best Trade Finance Solution in Malaysia

and also the Best Individual in Trading Malaysian Ringgit Bonds.

B) FINANCIAL RATIO ANALYSIS

Return on Assets

Return on Assets =

Year Maybank (RM000) UOB (RM000)

2015 5,834,287 1,067,546
=0.0118 95,292,063
= 0.0112
492,390,953
2016 6,422,644 1,102,331
=0.0129 100,415,676
= 0.01098
496,062,610

Compare between year 2015 and year 2016 in UOB. UOB has higher ratio of ROA in year

2015(1.12%) than ratio of ROA in year 2016 (1.10%). The return on assets can become lower

in year 2016 due to affected by the component of total assets. Based on the annual report UOB,

the ratio will be lower because cash and short term funds increased by 52.62%, securities

purchased under resale agreements decreased by 8.7%, deposits and placements with financial

institutions only stated in year 2016 (RM589100), total financial assets at fair value through

profit or loss (FVTPL) decreased by 87.57%, total available-for-sales (AFS) securities

increased by 31.43%, loan, advances and financing increase by 7.84%, derivative financial

assets, other assets1 decreased by 48.33%, statutory deposits with Bank Negara Malaysia2

decreased by 5.14%, investment subsidiaries decreased by 20%, investment in an associate

remain unchanged in both year, property, plant, and equipment increased by 10.92%, tax

recoverable and deferred tax assets3 increased by 12.58%.

Compare between year2015 and year 2016 in Maybank. Maybank has lower ratio of ROA

in year 2015(1.18%) than ratio of ROA in year 2016(1.29%). The return on assets become

higher in year 2016 due to affected by the component of total assets. Based on the annual report,

the ratio will be higher because cash and short term funds decreased by 7.09%, deposits and
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 placements with financial institutions decreased by 31.13%, securities purchased under resale

agreements decreased by 70.46%, total financial assets at fair value through profit or loss

increased by 89.02%, total available-for-sales securities decreased by 0.06%, financial

investments held-to-maturity decreased by 12.19% ,loan, advances and financing increase by

2.77%, derivative asset decreased by 0.16%, other assets decreased by 33.08%, statutory

deposits with Bank Negara Malaysia decreased by 4.14%, investment subsidiaries increased

by 2.66%, investment in an associate remain unchanged, property, plant, and equipment

decreased by 2.37%, intangible assets increased by 4.04, deferred tax assets decreased by

18.81%.

Compare between Maybank and UOB in year 2016. UOB has lower ratio of ROA compare

to Maybank. Maybank has a highly experienced team in Asian equities as well as the global

financial sector and have strong core profitability. Maybank ability to offer a wider suite of

products to their customers this can cause the net income of Maybank increase dramatically.

Maybank had risen demand for capital market activities, this can strengthen opportunities to

grow income.

Return on Equity


Year Maybank (RM000) UOB (RM000)
2015 5,834,287 1,067,546
=0.1130 = 0.1389
51,618,383 7,687,380
2016 6,422,644 1,102,331
=0.1127 = 0.1311
57,004,632 8,409,801
Return On Equity Capital

Compare between year 2015 and year 2016 in UOB. UOB has higher ratio of ROE in year

2015(13.89%) than ratio of ROE in year 2016 (13.11%). The return on equity can become

lower in year 2016 due to affected by the component of total equity. Based on the annual report

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UOB, the ratio will be lower because Share Capital4 remain unchanged in both year, total

reserves5 increased by 10% towards the year.

Compare between year2015 and year 2016 in Maybank. Maybank has higher ratio of ROE

in year 2015(11.30%) than ratio of ROE in year 2016(11.27%). The return on equity become

lower in year 2016 due to affected by the component of total equity. Based on the annual report,

the ratio will be lower because share capital increased by 4.42%, share premium increased by

11.50%, share held in trust increased by 4.65%, retained profit increased by 37.02%, and

reserve increased by 6.07%.

Compare between Maybank and UOB in year 2016. UOB has higher ratio of ROE than

Maybank. It indicates that UOBs shareholders have received the benefit from investing their

Net Interest Income =

Year Maybank (RM000) UOB (RM000)

2015 8,328,372 1,907,216
=0.0169 = 0.02001
492,390,953 95,292,063

2016 8,152,611 1,928,296

=0.0164 = 0.01920
496,062,610 100,415,676

capital in the financial firm more than Maybank. According to The Star Online Report, UOB

bank have been growing in the residential and non-residential space. However, the investor

confidence is very high in UOB, this can increase the shareholder equity. In the year 2016,

local bank (Maybank) had lose some competitive advantage over most foreign banking (UOB)

the area of cross border banking.

Net interest Income

Compare between year 2015 and year 2016 in UOB. UOB has higher ratio of net interest

income in year 2015(2%) than ratio of net interest income in year 2016(1.92%). The interest

income ratio is affected by two component of asset and net interest income. Net interest income

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is differences between interest income and interest expense. When interest income increased

by 4.96 %, interest expense increased by 7.99%, so the ratio will become smaller in year 2016.

Compare between year2015 and year 2016 in Maybank. Maybank has higher ratio of net

interest income in year 2015(1.69%) than ratio of net interest income in year 2016(1.64%). The

interest income ratio is affected by two component of asset and net interest income. Net interest

income is differences between interest income and interest expense. When interest income

increased by 2.20%, interest expense increased by 7.79%, so the ratio will become smaller in

year 2016.

Compare between Maybank and UOB in year 2016.Maybank has lower amount of

noninterest revenues stemming from services fees the financial firm has been able to collect

and higher amount of noninterest cost incurred compare to UOB. The weaker earnings of

Maybank caused by decreases in total income, which contracted for four straight quarters. Non-

interest income declined by a further 11.9% year-on-year, after falling by some 20%. Average

net interest margins weakened slightly for Maybank. UOB have provided wide range of

product to suit for their customer so their income is better than Maybank. The stronger margin

was also underpinned by the intense efforts by UOB to manage assets and liabilities more

efficiently.

Operating Efficiency Ratio =

Year Maybank (RM000) UOB (RM000)

2015 5,629,901 1,052,416

=0.4248 = 0.3910
13,252,040 2,691,893
2016 5,339,639 1,082,291
=0.3654 = 0.3865
14,614,625 2,799,978
Operating efficiency ratio

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 Compare between year 2015 and year 2016 in UOB. UOB has higher ratio in year

2015(39.10%) than ratio of operating efficiency in year 2016(38.65%). The ratio is affected by

component of operating income and operating expenses. When operating income increased by

4.02 %, operating expense increased by 2.84%, so the ratio will become smaller in year 2016.

Compare between year 2015 and year 2016 in Maybank. Maybank has higher ratio of

operating efficiency in year 2015(42.48%) than year 2016(36.54%). The ratio is affected by

component of operating income and operating expenses. When operating income increased by

Non-performing Loan Ratio =

Year Maybank (RM000) UOB (RM000)

2015 3,976,536 299,728
=0.0137 71,058,275
= 0.004218
291,106,405

2016 4,686,855 197,624

=0.0156 76,630,127
= 0.002579
300,358,177

10.28 %, operating expense decreased by 5.16%, so the ratio will become smaller in year 2016.

Compare between Maybank and UOB in year 02016.Maybank has a lower operating

efficiency ratio compare with UOB in 2016. This prove that the percentage changes in

operating expense is less than the percentage changes in revenue. Maybank had risen demand

for capital market activities, this can strengthen opportunities to grow fee income, so that the

revenue for Maybank is grow faster than UOB.

Non-performing Loan

Compare between year 2015 and year 2016 in UOB.UOB has higher ratio in year

2015(0.004) than ratio of non-performing loan in year 2016 (0.003). The ratio is affected by

component of non-performing loan and total loan. Non-performing loan are affected by surplus

eligible provisions over expected losses which is increased by 57.85% and collective

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impairment provisions increased by 2.48%. Total loan (loan, advances, financing) is increased

by 7.84%.

Compare between year 2015 and year 2016 in Maybank. Maybank has lower ratio in year

2015(0.0137) than ratio of non-performing loan in year 2016 (0.0156). The ratio is affected by

component of non-performing loan and total loan. Non-performing loan are affected by amount

recovered increased by 12.44% and amount written off decreased by 44.14% .Total loan (loan,

advances, financing) is increased by 3.18%.

Compare between Maybank and UOB in year 2016. In year 2016, UOB has higher ratio

than Maybank. Unlike the local bank (Maybank), the foreign banks(UOB) appeared to be

increasingly cautious on the small and medium enterprises as well as the consumer segment,

with loans in both declining at a faster pace than the local Bank.

C) CAMELS FRAMEWORK RATING

Capital Adequacy

The bank shall apply the Bank Negara Malaysia rules for calculating the capital adequacy

ratios. Maybank and UOB should achieve minimum capital adequacy requirements set by

BNM.

Minimum Capital Adequacy

CET1 Capital Ratio Tier 1 Capital Ratio Total Capital Ratio

4.5% 6.0% 8.0%

Bank MAY BANK UOB

Year 2015 2016 2015 2016

CET1 Capital 15.78% 15.88% 14.31% 15.37%

Tier 1 Capital 17.97% 18.23%

Total Capital 17.97% 19.43% 17.50% 18.70%

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In year 2015 and 2016, the Maybanks and UOBs CET1 capital ratio, Tier 1capital ratio and

total capital ratio had exceed the minimum regulatory capital adequacy ratios set by the Bank

Negara Malaysia, which means that Maybank and UOB has sufficient capital to buffer itself

against large losses so that its depositors are not in risk.

Based on the annual reports, the Capital Adequacy Ratios of Maybank and UOB for year 2015,

and 2016 are as follow:

Capital Adequacy Maybank (000) UOB(000)

= Total Capital
X100
Risk Weight Asset

2015 47,686,050 9,285,974

= 0.1797 =0.1750
265,375,120 53,071,756

2016 51,903,658 10,085,866

=0.1943 =0.1870
267,105,026 53,941,551

Maybank has a higher capital adequacy ratio compare with UOB in year2015 and year2016.

That mean Maybank has more sufficient cushion to absorb a reasonable amount of losses

before Maybank become insolvent and consequently lose depositorss funds than UOB. At the

same time, UOB has a higher risk become insolvent and lower efficiency and stability in its

financial. The depositors funds are given a higher priority than banks capital during the

process of winding up. The depositors can only lose their savings if bank registers a loss

exceeding the amount of capital it possesses. Thus, the higher the bank capital adequacy ratio,

the higher the degree of protection of depositors funds.

Asset Quality

Non-performing loan is the important indicator to asset quality that can help to measure the

credit risk that associated to particular asset.

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Based on the annual reports, the asset quality ratios for Maybank and UOB in year 2015 and

2016 are as follow:

Non-performing Loan Ratio =

Year Maybank (000) UOB (000)
2015 3,976,536 299,728
=0.0137 71,751,841
= 0.004178
291,106,405
2016 4,686,855 197624
=0.0156 77,399,653
= 0.002553
300,358,177

UOB has lower non-performing loan ratio compare with Maybank in year 2015 and year 2016.

This show that UOB has high recovery efforts and success in collecting back the non-

performing loan from its bad debt. UOB appeared to be increasingly cautious on the small and

medium enterprises as well as the consumer segment, with loans in both declining at a faster

pace than the Maybank. In the other way, we can conclude that UOB has a good managing in

loan so UOB has less impaired loan compared with Maybank. In the table below, we can see

that UOB has decreased 0.20% in year 2016 compare with year 2015. At the same time, the

net impaired loan of Maybank has increased by 0.20% so that the non-performing loan is higher

than UOB. Chairman of UOB stated that the allowance for impairment on loans, advances and

financing increased by 22.0 per cent to RM249.7 million from RM204.7 million due to higher

individual impairment of RM50.8 million. However, this was partly offset by lower collective

impairment of RM5.8 million. The asset quality remained strong with net non-performing loans

ratio at 1.3 per cent. In 2016, UOB launched Islamic banking window to offer customers a

comprehensive suite of solutions. UOB shows higher stability of the company when faced with

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particular risks.

Bank MAYBANK UOB

2015 2016 2015 2016

Year

Net impaired 1.37% 1.57% 1.50% 1.30%

loans/non-

performing

loan(%)

Management efficiency

In the case of measuring management efficiency of the bank, there is some qualitative factors

we can consider.

Technical competence

UOB: As stated in the future outlook, UOB will continue to enhance its technology

infrastructure across the bank, including the online banking and social platform capabilities

to ensure the quality of customers experience. We examined the UOB Business app in

Google Play Store, found out that there are poor reviews of the user interface and lacks of

functions compared with other commercial banks. This indicate that UOB is not doing well

in improving their technical competence.

Maybank: Maybank on the other hand, has achieved one million users on its mobile

banking app Maybank2u which provides basic features like account checking and

transfer, the app is also frequently updated to fix the bugs. Overall, it is able to satisfy users

daily needs.

Leadership and administrative ability

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 Maybank: Maybank is always famous of its generosity in giving dividend payments to

shareholders, it recorded a 6.3% of dividend yield in financial year 2016. Although it may

be due to many directors are the major shareholders and they benefit more from dividend

payment, it is still a sweetener for those who interested in investing the company. Maybank

remains optimistic towards its business outlook, and it will focus more on opportunities

within retail SME segment and corporate lending.

UOB : Through our research on the bank, we know that the net profit for UOB profit

attributable to shareholder drop by 17.5% from 2014 to 2015. Interestingly, we also found

out that the remunerations including benefits of kind for executive and non-executive

directors has increased by 6.58%. Although this is only a wild assumption, as shareholders,

we expect the board of directors can go through good and bad times with us. Only those

who value their shareholders can lead the company to a better future. Thus, we will have

lower rating in the leadership and administrative ability for UOB.

Banking regulations compliance

Both Maybank and UOB comply to the minimum regulatory capital adequacy ratio set by

the Bank Negara Malaysia. Besides, they are no signs in violating any of the rules and

regulations. Both banks also have their overhead expenses included of assurance and

compliance related services, which refer to reporting to accountants, periodically review of

engagements and regulatory-relate services. Meanwhile this indicate the banks do showing

effort in complying to the legal laws. Therefore, we give a high rating for the banking

regulations compliance to both banks.

Earnings performance

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In analyzing the earnings performance of banks, we select two indicators which are return on

equity (ROE) and annual growth rate in profits. Note that these indicators are to be compared

with industry average of banking sector in Malaysia to be meaningful, bank which can

outperform the industry average will gain a higher rating in earning performance, indicate that

it has sufficient capability to absorb losses from economic downturn and relatively stable for

investing if the earnings is not volatile from time to time.

Return on equity(ROE)

Year UOB Maybank

2015 11.30% 13.89%

2016 11.27% 13.11%

ROE

Maybank: Maybank also recorded ROE above the sector average for both consecutive years

which are 11.30% in financial year 2016, and 11.27% in financial year 2015. Not a surprisingly

good performance, mainly due to reduced loan growth and weakness in domestic market.

However, we observed the dividends payments of bank has decreased by 8.76% from 2015 to

2016 that indicate the factors that boost ROE is mainly due to increasing of profit but not

distribution of dividends to shareholders. We expect the banks is holding more reserve to face

the challenges in FY2016.

UOB: As shown in figure, ROE forecast for the banking sector in Malaysia is 10.7% in

financial year 2016 (2015:10.5%), Maybank recorded a satisfactory result which is 13.89% in

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 FY2016 (2015:13.11%) that outperform the sector average forecasted. The high level of ROE

can build investors confidence. Still, UOB distribution of dividends has dropped from

453million in year 2015 to 373million in year 2016, signify company do not have enough

excess reserve available for shareholder.

Growth in profit

Net profit

Year Maybank(RM000) Annual growth UOB(RM000) Annual growth

rate (%) rate (%)

2014 5,903,015 2.84% 1,294,284 -5.2%

2015 5,834,287 1,067,546

2016 6,422,644 1,102,331

We calculate annual growth rate of net profit for three consecutive years to clearly illustrate

the banks stability in generating the earning for shareholders.

Maybank: Account for 2.84% annual growth rate in net profit shows Maybank strong ability

to maintain its profit level, even taken continued impact from Bank Negara Malaysias tighter

lending criteria that curb excessive household debt, decreasing household loan growth from

10% in 2014 to 8% in 2015. In annual report Maybank also stated to target in line performance

with industry growth and continue expanding fee-income generating activities in the future.

Maybank is expected to maintain a healthy loan growth that ensure stable earnings by focusing

the opportunities within customer segment, retail SME and corporate lending.

UOB: The Malaysian economy faces challenges with uncertainty over oil prices, the

weakening of Ringgit against US Dollar and a moderation in private consumption. Thus it

further reduces house loan leasing and corporate loan. In a result causing UOB to have lower

performance in net profit earnings in 2015 and 2016 and record an annual growth rate of

negative 5.2% in net profit. However, with the high expectations in global economy recovery

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in year 2017 due to large government and private sector investments, it is foreseeable UOB can

enlarge its customer base and good loan business growth. Suggestion to UOB is it need to

improve its efficiency in managing operating expenses that will derail the earning capability.

Liquidity: Liquidity is to ensure adequacy liquidity to customers withdrawal to prevent bank

run.

In UOB Bank, we can measure that it has -0.6202 liquidity in year 2015 but it has 0.1277

liquidity in year 2016. It can observed that UOB bank has not deposits and placements with
Liquidity

2015(RM000) 2016(RM000)

UOB BANK 7735351 66837567 11805740 + 5889100 4872733

95292063 100415676
= -0.6202 = 0.1277

MAYBANK 41278089 + 14748271 37904688 38350931 + 19339287 29856710

492390953 496062610

= 0.0368 = 0.0561

financial institutions(asset) so when deposits and placement of banks and other financial

institution (liability) is higher than cash and short-term funds(assets), it will have negative sign

figure in year 2015. In year 2016, UOB bank has deposits and placements with financial

institutions and cash and short-term funds (assets is higher than deposits and placement of

banks and other financial institution (liability) so that it will have positive sign figure. Between

in year 2015 and in year 2016, liquidity ratio in year 2016 is higher than in year 2015, and it

has increased by 120.59% from year 2015 to year 2016 in UOB Bank. In Maybank, liquidity

ratio in year 2016 is higher than in year 2015, and it has increased by 52.44% from year 2015

to year 2016. Compare with both UOB Bank and Maybank in year 2016, UOB Bank has higher

15
 ratio than Maybank bank, it can be observed that UOB Bank is more than capable of meeting

any demands by its depositors or borrowers.

(a) Sensitivity to market

Sensitivity to the market is one of the most complex measurement area for banks. Sensitivity

measures how risk exposures can affect a financial institution. The sensitivity to market risk of

financial institutions is assessed by monitoring the credit management. Sensitivity known as

sensitivity to market risk, especially interest rate risk. Based on Annual Report, there are some

interest rate risk as the exposure of a banks financial condition to adverse movements in

interest rates as shown below:

Maybank ( Annual Report 2016, Maybank) UOB bank ( Annual report 2016, UOB Bank

(i) Interest/profit rate risk: arising from changes in yield curves, (i) Foreign exchange risk

credit spreads and implied volatilities on interest rate options. (ii) Interest/Profit rate risk

(ii) Foreign exchange rate risk: arising from adverse movements (iii) Value-at-Risk

in the exchange rates of two currencies.

(iii) Equity price risk: arising from changes in the prices of

equities, equity indices and equity baskets.

(iv) Yield/Profit rate risk: changes in the slope of yield curve.

Maybank ( Annual report 2016, Maybank) UOB bank (Annual report 2016, UOB Bank)

Standardised Approach Standardised Approach

Internal Model Approach

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Camels Rating (Sensitivity to market) allows the management to identify, measure, and control

market risk (as shown above) given the banks to exposure these risk. However, both of bank

has use some approach to measure and control trading market risks.

D) FIVE RISKS FACED BY BANKS

Credit Risk

We select one indicators in the measurements of credit risk of banks, which is Non-performing

loan ratio. The figure used is based on the findings of CAMELS (Part 3)

UOB: Although UOB recorded a lower NPL ratio compared to Maybank in financial year 2015

and 2016, it has increased by 63.65% in year 2016 with year over year basis compared to itself.

Default borrower is increasing, and the credit risk faced by UOB is the higher individual

impairment in year 2016. The recommended mitigation for the problem is to set stricter risk

approval conditions for the borrowers. The other crucial thing is the diversification of asset

portfolio, beside from the finance, insurance and business services, the second largest economic

sectors accounted in UOBs asset is purchase of residential properties, the household

investment value is expected to be declined due to excess supply in the market. UOB may face

credit concentration risk due to single large exposure on certain sectors.

Maybank: Maybank has a higher NPL ratio than UOB, mainly due to its loan portfolio is

focusing on high risk corporate loan more, the corporate loan size is accounted for 47.07% of

its total gross loan, advances and financing. This business nature set Maybank in a higher credit

risk situation. The mitigation for this is to monitor the situation of borrower closely and take

immediate actions when any sign of default happens.

Liquidity Risk

Liquidity risk aligned with the banks ability to hold sufficient fund to meet deposit

withdrawals, loan or financing disbursements. The bank also employs liquidity early warning

indicators and trigger points to signal possible contingency situations.

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We select Loan-To-Deposit Ratio as indicator to examine the company liquidity status, if the

ratio is too high, it may not have enough liquidity to cover future fund requirements. However,

if the ratio is too low, it indicates bank is not earning as much as it could with the deposits from

customers.

Loan to Deposit ratio

Year UOB Maybank

2015 86.53% 78.99%

2016 88.34% 82.05%

Figure 4.1

Maturity of Liabilities UOB : UOB recorded a 86.53% Loan-

UOB Bank Malysia 2016 to-deposit ratio in both financial years,
2% 3%
20% is on par with Malaysian banks ideal
1-3months
3-6months
average which is 85% to 90%, that
6-12months
13% 1-5years means UOB has sufficient room for
62%
over 5 years
future fund requirement, at the same

time it does not sacrifice too much earning potential. Also, according to the liabilities

breakdown arrange by maturity shown in Figure 4.1, the UOB has 62% short term borrowings

within 1 to 3 months to finance their operations, and has only 5%of borrowings matured in

more than 6 months. This will possibly incur liquidity crunch of bank in the future if

unexpected raise of deposit withdrawals happens. UOB should try to acquire more long-term

funds rather than short-term borrowings.

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Maybank: Maybank has lower loan- Maturity of Liabilities
to-deposit ratio compared with Maybank Malaysia 2016
industry average, that is 82.05% in
0% up to 1month
25%
2016 (2015:78.99%), that generally 35% 1-3months
3-12months
means Maybank has more than
1-5years
23%
sufficient liquidity to meet customers 17% over 5 years

Figure4.2
obligation, in the exchange of some

earning potential. From the breakdown of maturity of liabilities of Maybank(Figure4.2), we

see it is quite balanced in the timeframe of borrowings, as each amounted for almost the same

weightage, and also short terms borrowings is lower than UOB banks. Indicate lower liquidity

risk for Maybank. There is approximately 0% of liabilities matured in 1-month time.

Market Risk

Interest rate risk

UOB: The Bank estimates a daily Value-at-Risk (VaR) within a 99 %confidence interval using

the historical simulation method, as a control for market risk. The calculation assumes that the

possible changes in future market rates can be predicted by observing historical market

movement. The interest rate VaR as at 31 December 2016 is RM1,441,000, which indicate that

UOB has 99% of confidence that the lose occurred as of interest rate will not more than the

figure. Given that net profit on the financial year is 1,102million, the maximum impact of

interest rate risk will be accounted for 0.13% (1,441,000/1,102,331,000) on net profit.

Maybank: Maybank evaluate interest rate risk using Earnings-at-Risk (EaR) methodology

which is simulated based on a set of standardized rate shocks on the interest rate gap profile

derived from the financial position of the Bank. Where by a 1% increase in interest rate will

bring a positive RM446million impact to profit after tax, and vice versa.

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 Foreign exchange risk

UOB: The bank daily Var on 31 December 2016 for foreign exchange is RM1,255,000,

whereby there is a 33.51% increase compared with previous financial year. The greater risk

occur is because the bank holding more foreign direct investment in year 2016.

Maybank: Maybank controlled their foreign exchange risk by doing hedges in respective

currencies. However, the total hedges done by the Bank only account for 18.52%

(RM6,030million) in the total currency exposures (RM32,554million) in overseas operations.

For 1% appreciation in foreign exchange rate, it will bring a negative RM33million impact to

profit after tax of the bank.

Operational Risk

Operating expenses (retrieved from Part 2)

Year Maybank UOB

2015 5,629,901 1,052416

2016 5,339,639 1,082291

Operational risk refers to risk of loss resulting from failed internal processes, people and

system.

For both banks practice three lines of defence concept. The first line is implementing

operational risk framework and maintaining the business resilience for key activities. There is

a Risk Taking Unit works to ensure their activities are comply with the framework set. Second

line of defence is exercising governance on framework set and reporting issues to the senior

management. The process can be illustrated by identifying, measuring, controlling, reporting

and monitoring the operational risk. The third line is internal audit that have independent

assurance on the internal control effectiveness. The key risk mitigation policies are

implemented to create a sound operating environment that minimize the failure and fault in the

business daily operation.

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Maybank: The management was not doing well in controlling the other operating expenses

causing there is higher figure in year 2016.

UOB also took an insurance programme to further protect it from the risk of loss derived from

crime, property damage and public liability.

Capital risk

Capital risk arise when banks do not insure the value of asset hold, there is probability that

asset decline in value under total liabilities as of unexpected events happen. In measurement of

capital risk of bank, we use the indicator of capital adequacy ratio, which computed in Camels

analysis, Part 3.

UOB: exceed the minimum ratio requirement for the bank in Malaysia, which indicate the

bank has sufficient room to react to the possible abnormal changes on the equity capital level.

UOB is trying to acquire fund more from capital, and less from liabilities. The customer will

then feel more secure and have confidence on the banks long run survival.

Maybank: also achieve the minimum ratio requirement for banking sector in Malaysia, show

that Maybank is not taking that much risky assets as compare to the current equity capital. We

found out that Maybank take precautionary capital policies in order to maintain its financial

stability to better react to any disruption on capital changes. As for that, we conservatively

assumed lower loan growth in the future and may affect the earnings momentum of Maybank.

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 E) EXPLANATION ON FINDINGS

According to the financial analysis in the part B, we found that UOB is better in return

on equity (ROE) compare with Maybank. This show that UOB able to generate a higher profit

to its shareholder than Maybank. In the other way, we can say that investor more prefer invest

in UOB when compare with Maybank. Besides that, we also found that Maybank has a higher

return on asset (ROA) than UOB. This mean that Maybank has a good management in using

its assets to generate earnings. Maybank ability to offer a wider suite of products to their

customers this can cause the net income of Maybank increase dramatically

Based on the overall performance CAMELS of both bank, it indicates that performance

of Maybank better than performance of UOB Bank. Bank Negara Malaysia has already set the

standard based on CETI Capital Ratio (4.5%), Tier 1 Capital Ratio (6.0%), and total capital

ratio (8.0%). Both of banks ratio must greater than Bank Negara Malaysias ratio. However,

we can observe that both of the bank has reach maximum ratio of Bank Negara Malaysia, but

compare between both of the bank, Maybank has higher ratio than UOB Bank. For both year,

Maybank is better than UOB Bank so Maybank can use more capital for long-term survival.

Therefore, UOB bank should attract more investors to invest their bank. In management

efficiency ratio, we can observe that Maybank has better technology than UOB Bank because

UOB Bank has poor reviews of the user interface and lacks of communication with their

customers, so UOB Bank should improve on their technology by allotting some cost to employ

staff to maintain and monitor the functioning of online banking and social platform capabilities

in order to know customers needs and wants. Besides that, Maybank has high dividend in

industry average, high corporate loan, net profit increase, high potential revenue compared to

UOB Bank. The performance of UOB Bank is not better than Maybank as they have not better

control and manage on their capital. Therefore, UOB Bank should focus on how to increase

their profit earned than focus on their staff by giving them a high salary. In liquidity, UOB

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Bank is higher than Maybank, this indicates that UOB Bank has well managed the risk that

arise because of mismatches between the asset and liability.

In terms of risk management, both banks are slightly different in their approaches. For

example, in foreign currency exchange risk both banks face. Maybank intends to change the

dominant currency in the operations to ringgit basis gradually. While UOB make effort in

hedges by various of financial derivatives. As ringgit Malaysia is not looking good in the future,

we suggest Maybank to use more hedging tools to minimize the loss. In the aspect of liquidity

of banks, UOB focused on using short term liabilities to finance the company, while Maybank

has a balanced timeframe in the maturity of the borrowings, we can expect Maybank to have

healthy liquidity to meet the customer obligations.

Overall, we conclude that UOB is better than Maybank in terms of profit making and

generate more value to shareholders as Maybank net profit is not growing fast enough, mainly

due to reduced loan growth, and the market customer base becomes saturated. However, in

terms of capital adequacy management, Maybank controls its equity with regard of asset better

than UOB, generally indicate less risk for the investors. Maybank has sufficient capital to

absorb losses from unexpected events and able to achieve long run survival in exchange of its

profit growing potential. It has develop a mature risk management framework for the bank to

comply and operate. Meanwhile, UOB take a higher risk situation in its profit growing and

therefore required more care in risk management.

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APA Reference

Asset Quality Rating.(n.d). Asset Quality Rating. Retrieved from

http://www.investopedia.com/terms/a/assetqualityrating.asp

Bank Negara Malyasia.(n.d). Capital Adequacy Framework (Capital Components).

Retrieved from
http://www.bnm.gov.my/guidelines/01_banking/01_capital_adequacy/Capital
_Adequacy_Framework_Capital%20Components_Oct2015.pdf

M. (2017, April 12). Loan to Deposit Ratio Malaysia. Retrieved July 23, 2017, from
http://mypf.my/2015/11/22/loan-to-deposit-ratio-malaysia/

Policy and Strategy. (n.d.). Retrieved July 23, 2017, from

http://www.allbankingsolutions.com/Banking-Tutor/credit-risk.shtml

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Glossary (Based On Annual Report UOB 2016)

Deferred Tax Assets: Deferred tax assets and liabilities are offset when there is a legally
enforceable right to set-off current tax assets against current tax liabilities in respect of each
entity and when the deferred income taxes relate to the same tax authority. However, the
amounts of net deferred tax assets, calculated at the current applicable tax rate, which are not
recognised in the financial statements due to uncertainty of its realisation for example
(Unutilised tax losses, unabsorbed capital allowances). The unutilised tax losses and
unabsorbed capital allowances of the Group are available indefinitely for offsetting against
future taxable profits of the respective entities within the Group, subject to no substantial
change in shareholdings of those entities under the Income Tax Act, 1967 and guidelines issued
by the tax authority.
Other Assets as shown below:
Other receivables, deposits, prepayments: The Bank has an equity interest in House Network
Sdn Bhd (HOUSe), where the Bank holds RM1 paid up ordinary share capital, which is
included in other receivables, deposits and prepayments.
The principal activities of HOUSe are that of management and administrative services for the
shared Automated Teller Machine (ATM) network amongst its member banks. The other three
partners of HOUSe are HSBC Bank Malaysia Berhad, OCBC Bank Malaysia Berhad and
Standard Chartered Bank Malaysia Berhad.
Amount due from subsidiaries: Amount due from subsidiaries are unsecured, interest free
and repayable on demand.
Precious Metals accounts: As at 31 December 2016, precious metal accounts comprise the
following:
(i) Precious metals on-loan to customers of the Bank are directly sought from the gold
market amounting to RM28,016,000 (2015: RM95,238,000). The net balance due
from customers of the Bank are stated at the gross amounts loaned amounting to
RM47,310,000 (2015: RM42,483,000) net of cash collateral received from the
customers of RM24,495,000 (2015: RM27,396,000).
(ii) Precious metals lent to the ultimate holding company and another financial
institution amounting to RM129,090,000 (2015: nil) and nil (2015: RM45,726,000),
respectively.
(iii) Precious metal accounts due from financial institutions amounting to
RM67,733,000 (2015: RM145,092,000).
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Other Assets: The gross amounts loaned to customers and precious metals lent to the ultimate
holding company and another financial institution are marked-to-market based on the quoted
market prevailing prices of the respective precious metals as quoted by the London Bullion
Market Association.
Statutory Deposits with Bank Negara Malaysia: The non-interest bearing statutory deposits
are maintained with Bank Negara Malaysia (BNM) in compliance with Section 26(2)(c) and
Section 26(3) of the Central Bank of Malaysia Act, 2009. The amounts are set at a
predetermined percentage of total eligible liabilities.
Share capital: UOB Company authorised 2,000,000,000 ordinary shares of RM1 each, at the
beginning and end of the financial year and issues and fully paid-up 470,000,000 ordinary
shares of RM1 each, at the beginning and end of the financial year.
Total reserves got include as shown below:
(a) Statutory reserve: The statutory reserve is maintained in compliance with Section 12
and Section 47(2)(f) of the Financial Services Act 2013 (FSA), Section 12 and Section
57(2)(f) of the Islamic Financial Services Act 2013 (IFSA) and is not distributable as
dividends.
(b) The revaluation reserve: In respect of gain from revaluation of freehold land, leasehold
land and buildings.
(c) Retained profits: The Bank may distribute dividends out of its entire retained profits
as at 31 December 2016 under the single tier system.

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27