Stop Blogging.

Hi folks,

I would like to inform you all that I have decided to stop my blogging activity. It is better to inform you all of my decision rather than wasting your time to return day after day to find that this blog is without any update.

I would like to thank bloggers who have featured my write ups especially Dali and Moolah as each featured post do bring in new visitors and some of this new visitors did end up staying on and become returning readers of this blog.

I would also like to thank readers who keep returning to read what ever stuff that I am writing especially those that leave a comment. It has been great fun receiving all your comments and e-mails. I apologize if I   miss some of your e-mails. For those that answer all sort of stupid questions that I asked in our e-mail exchanges, I thank you all for your patience. I hope to maintain contact with you all via e-mail.

I will keep my e-mail. You can contact me via goodstockbadstock@gmail.com. 

It has been great fun writing this blog. I hope you all learn as much from what I write as what I learn from you all.

Bye.

P.S.: For Malaysian readers, do not forget to register to vote. With post offices in quite a number of shopping malls, there is no excuse not to register to vote. I do not care who you voted for, be it BN, PR or an independent candidate. Take ownership of your country and vote based on policies rather than personalities.

No to Half-Yearly Reporting

The SC launched the 5 year Corporate Governance Blue-Print yesterday. The blue print can be downloaded here. At a glance, some of the measures introduced are welcomed like the use of poll voting for significant related party transactions. However, quite a number of them, I feel are cosmetics reform that add no real value. It is mere adaptation of some corporate governance measure practice by the West that may not necessary worked well in an Asian environment.

However, I am very much against one issue discussed in the blue print, that is, to reduce the current quarterly reporting to a half-yearly one. Although the issue did not make it to the recommendation list, the mere mentioned of it is shocking. I welcomed the decision to shortened the submission time frame for quarterly and annual report to ensure more timely disclosure. But, to shortened the submission time frame of annual report but at the same time revert to half-yearly reporting, it is like taking a half step forward and one step backwards. Net net, we are taking  half step backwards.

The implementation of half-yearly reporting would further tilt the information advantage to that of the management, the fund managers and the analysts at the expense of retail investors. The CIO of CIMB-Principal Asset Management has this to say about the measure in an interview with Business Times, 

"It will also allow fund managers and analysts more time to go and meet the company (management) to do their analysis ... a lot of times, they have to wait because of the blackout period (during which the company can't talk until the results are out)," he remarked.

He suggested that companies hold quarterly briefings to give investors a "snapshot" on how they are doing, rather than issue financial reports.

What he is implying is that, with a less frequent blackout period, he and his team of analysts can meet with the management more frequently. He could obtain information from the management about how the company is doing, information that is not available to the general public,thereby, gaining an information edge over the rest of the investors. He could then trade with this information ahead of the investors. It certainly makes his job much easier but it is at the expense of retail investors who have no such privileged of getting access to management.  The suggestion of holding quarterly briefings instead of issuing financial reports is a self-interested suggestion. Retail investors have no access to such briefings, but, the fund managers have access to such information.

The information advantage extend towards the management. In quarterly reporting, the information advantage that management has over the rest is 4 months as each quarterly report will reduce their information edge. In a half-yearly reporting, the information advantage is about 7 months. So, they have much more time to trade with this information at the expense of retail investors. If the management discloses this sort of information to the analysts and fund managers, the information edge will be shared by the fund managers too. That's the reason you see someone like the CIO of CIMB-Principal Asset Management and Tan Sri Krishnan Tan of IJM pushing for half-yearly reporting. Half-yearly reporting is to their advantage. The management and fund managers may know about the company plant is operating at full capacity on February, but, the retail investors would only know about such information in July. Within the February to July time frame, they can do a lot of trading.

I would also like to address some ridiculous reasons given out by these self-interested person to justify half-yearly reporting. The CIO of CIMB-Principal Asset Management says this,

it is a good move to do away with quarterly reporting as firms will have more time "to run their business" rather than "scramble" to put out reports."

Firstly, it is ridiculous to suggest that it take like 10000 man hours to churn out a quarterly report. With the wide spread use of accounting software, one can actually generate a P&L,  balance sheets and etc with a click of the mouse. How hard is that? Perhaps, the CIO do not know how to use a mouse. What one need to do probably after churning out the P&L and stuff is to make sure the relevant accounting standards is apply correctly. In addition, they may make some segmental disclosure and etc. Instead of tallying up six months worth of transactions once every six months as with half-yearly reporting, one is tallying up three months worth of transactions once every three months as with quarterly reporting. It is similar perhaps a bit more work, but, it probably cost shareholders very little money. Why don't the CIO  of CIMB-Principal Asset Management suggest that management should do away attending road shows? Isn't that a distraction for the CEO of these companies from running the business? Isn't the time of a CEO is more precious than the time of an accounts executive? So, CEOs and CFOs attending road shows disclosing information to SELECTED investors is "running the business", accounts executive preparing quarterly report to disclose information to ALL investors is a "distraction". Oh, I nearly forgot, without roadshows, you do not have the information edge that you have over the retail investors. So, cannot suggest something that will hit your rice bowl....

Then, Tan Sri Krishnan Tan, another self-interested party said this,

Tan Sri Krishnan Tan, executive deputy chairman of IJM Corp Bhd, said it is becoming "absurd" to put out financial reports every quarter as it isn't a fair reflection of how the company may be doing.

"It doesn't have a lot of meaning ... let's just go for half-year and year-end reporting," he said at a panel discussion on the SC's five-year Corporate Governance (CG) Blueprint, which was launched here yesterday.

In addition, BT article also said this, 

quarterly reporting tends to promote short-term views

Although I agree with Tan Sri Krishnan that a quarter is not a fair reflection on how the company may be doing in the long run. It is essential for us to know what is the current financial position of the company. It is our rights to know whether the company position is deteriorating. There are generally signs that can be found from the financials for deteriorating or improving conditions. If the financial indeed do not reflect how a company may be doing, the management can provide explanation on why it is so. Is it appropriate to deny the shareholders rights to know what is happening in a company because sometimes but not all the time, the financial information do not reflect how a company is performing? Do we ban drinking because sometimes, but, not all the time it create domestic violence?  But, to be fair to Tan Sri Krishnan, I understand where he came from, he came from an industry where profit recognition is lumpy so, sometimes, a quarter do not mean anything to his company. But, not all companies in Bursa are from his industry. 

Then, there is this argument that quarterly reporting promote short term views. Is this the fault of quarterly reporting or is this the fault of how we make use of the information provided by quarterly reporting? Shouldn't we change our attitude towards the information provided rather than blaming it on the information? Plus, a lot of our firms is still family-owned firms with the majority shareholders has a lot of skin in it. The problem of short term-ism is much lesser here and do not affect the fundamentals of a company as much as it does in the West. The short term-ism problem is more of a problem of the analysts who covers the business. As long as it do not affect the business, it is not a major concern. The benefits of quarterly disclosure outweighs the problem cause by short term-ism and short sighted-ness of some analysts.

Then, on SC blue print, it said this, 

the European Union issued the European Union Transparency Directive in July 2007 which promotes half-yearly reports combined with Interim Management Statements issued between reporting dates.  

Wow, they research the issue so thoroughly that they quote the EU implementation. But, let's see what EU really said to see whether what SC said reflects the intention of the EU Transparency Directive. The EU Directive said this,

More timely and more reliable information about the share issuer's performance over the financial year also requires a higher frequency of interim information. A requirement should therefore be introduced to publish an interim management statement during the first six months and a second interim management statement during the second six months of a financial year. Share issuers who already publish quarterly financial reports should not be required to publish interim management statements.

What the EU is doing is that, the reckon the need for timely information. They want to have a higher frequency of interim information. So, instead of financial information being published ONCE a year, they are now promoting half yearly interim management statement. It is a half step FORWARD, which is expected because it is such a big union that drastic step is rarely taken. Countries that are ahead of the EU standards, that publish quarterly reports, should stick to their superior disclosure requirement. The interim management report is a MINIMUM STANDARD of best practices rather than the best practices. But, our SC spin it to make it sounds like, EU want half yearly reporting with interim management statement. SC says that, instead of sticking with our superior disclosure ruling, we should take a half step backwards and join EU with their minimum standard.

All in all, the half yearly reporting is a measure proposed by all sort of self-interested parties so that they could have the information edge, they could trade ahead of retail investors. They could treat retail investors as some idiots that can be taken advantage of.  Say no to half yearly reporting!

P.S.: Similar views from Moolah but with REAL LIFE EXAMPLES. Please read it at http://whereiszemoola.blogspot.com/2011/07/why-quarterly-earnings-reporting-must.html

MBSB According to the Internet

Before you read this post, please read the three other post on MBSB:

MBSB : The Amazing Credit Expansion to Civil Servants- Part 1

MBSB: The Amazing Credit Expansion to Civil Servants- Part 1A

MBSB- How to Run a Financial Institutions Prepared ONLY for Good Times -Part 2

Sometimes, if we just look at the financials, it do not tell you the whole story. We need to look at other things. Thankfully, the internet had made stock research a much more easier tasks. So, this is what the internet has to say about the loan MBSB is making. Some of them is in Malay, so, I hope you all can understand. If you can't, just use google translate.

One forumers said:

aku pun ada apply kowaja. Nasib baik tak lulus. Kalau lulus rugi banyak pulok... La ni nak try MBSB pulak. Dia kata leh kasi 80% potongan selepas tahun ke 5. Tahun 1 -5 60%. Aku pun tak faham fakta apa dia orang kasi. Aku dah le lemah Math. 

 

What kind of loan is this? First 5 years, 60% of the salary is directed to loan repayment. Only 40% left to survive and pay off OTHER LOANS. Then, from the 6th year onwards, salary deduction is reset to 80%. Can anyone actually survive with 20% of their pay for food, for housing, for clothes, for kids education? How high is the probability do you think that this fella will not pay back his loan? 

Another forumer who is probably an personal loan agent said this:

Pinjaman Pembiyaan Peribadi dari Malaysia Building Society Berhad (MBSB)..

- Blacklist, Ccris dan Ctos pun boleh mohon dan dijamin lulus..

and

MBSB hanya akan melihat pd commitment di ATAS slip gaji sahaja..comitment2 lain x dipandang..so jgn risau walaupun anda byk loan (yg x tertera atas slip gaji dan ptongan agkasa la)..boleh juga mohon.. 

So, even if you are blacklisted from CCRIS, you can still take loan from MBSB because MBSB look at pay slip commitment i.e. whether the borrower have borrow from other salary deduction scheme. MBSB do not look at your existing loan at all as long as it do not end up in your pay slip. Do you think this is the kind of lending standards that you are comfortable with? Do you think MBSB should anyhow play with the money of all the EPF contributor in Malaysia?

Then another agent said this:

PEMBIAYAAN PERIBADI MBSB

+ Pinjaman sehingga RM 300 000 selama 25 tahun  

+ Kadar keuntungan tetap SERENDAH 3.50%

+ Kelayakan gaji sehingga 80% 

+ Bayar selepas 6 tahun 

This is epic. One can enjoy loan for the first 5 years without making any payment. Then, you only start paying on the 6th year onwards. This is very tempting. What the heck MBSB is thinking?

What about their property loan, is their property loan a bit better, with higher lending standard? Look at what this forumer said:

what???  u no scared? interest rate going up wor...

but yes i heard mbsb giving 90% even u hav 10 property bcuz they r not under bank Negara.

10 property but still can get 90% financing..

I did not cherry-pick the comments so that only the worst comments come out. This is just a sample of what one would find online about the loans that MBSB is making. The agents also claimed about monthly sales of more than RM1mil and are offering their service to help people circumvent the rules so that they can borrow beyond their salary limit. Is this the sort of standard  you expect from an institution in which most Malaysians have a stake in via EPF?

P.S.: This is not the Part 3 that I said I am going to write. I just thought that this post shows us what is happening on the ground.

MBSB- How to Run a Financial Institutions Prepared ONLY for Good Times -Part 2

This is a continuation of my previous post on MBSB that can be found here and here. Since I am going to go a bit into the detail of MBSB, a disclaimer is warranted here. I have never own any bank stocks in my life. I found banks very hard to analyze and generally stay away from them. This is my first half-arsed attempt to take a look into a "bank" (ok, MBSB technically is not a bank, but, it takes deposit and makes loan, so, it is similar to a bank). So, read critically but do judge it based on what I wrote rather than what is my experience with banks.

I read in some forums that said that bloggers who wrote bad stuff about companies have a hidden evil agenda. I am not sure what "hidden evil agenda" that dickhead is talking about as Malaysia allowed no short selling. The market do not function like an ostrich, just because you bury your head in the sand, it does not mean people can't see you. Just because some bloggers do not write about a problem, the problem won't disappear. In general, it is easier to write about the good things rather than the bad things. Just reproduce what the management tell you, then, you can have material to write. Bad things involve digging, involve finding out stuff that people do not tell you. So, this post is about the bad stuff in MBSB because you can easily find the good stuff in analysts report. It add no value if I repeat the good stuff.

There is certainly good things going on at MBSB. The recent rights issue is a positive exercise. It would be better if they don't use the proceeds to extend fixed-rate personal loans. The potential divestment by EPF is a good news as the free float currently is around RM360mil. It is too small and there are not much institution holding that stock. Divestment may allow interest in the stock to pick up. If the world are headed for good times, they should do okay.

Has the growth rate fizzle?

This is one key question. Since the entire MBSB story is about their growth in personal loan extended to civil servant via salary deduction scheme, the answer to this question involve whether the market has already saturated. According to AMResearch analyst, the market still have a lot of legs to go. But, to achieve her market size, it involve ALL the civil servant holding personal loan worth RM106k each. Do you have 5% of your friends that have more than RM100k of PERSONAL loan? Probably not. Now, the analyst is saying that's the potential size of the market involve ALL civil servant having RM106k of personal loan. Is the number logical? Imagine, you go to office, every single person around you have a personal loan debt of RM106k, does it sound logical to you? So, the AMResearch market size is probably overstated.

Najib states that their decision not to give out 1-month bonus to civil servants have saved the government RM3.1b. So, with a loan book of RM3.9b, MBSB basically has given out personal loan to every civil servant worth 1-month of salary plus some in the short span of three years. The scary part is, MBSB is the smallest player in the block. Including the loans extended by the big players, EVERY single civil servants in Malaysia owe 10-plus month worth of their pay in personal loan. Do you have more than 5% of your colleague owing that much money in personal loan? Now, imagine every single of your colleague owe that much money. That's the scale of the market. With civil servants owing so much money, we should see signs of stress in their finances, right? Yes, we do have signs, bankruptcy among civil servants increase by 176% last year (To be fair, it increase from a very low base). CUEPACS president has this to say on the issue, "Most of them were due to default in car loans, maybe it is because their salary is low but already have other commitments and loans. So, when they buy cars, they face problems in paying". Is the other commitment and loans refer to the sort of loans that MBSB is extending? 

If one were to google in Malay the term "Penjawat Awam Muflis", you would find more stories. Now, BNM also said that they are going to monitor the personal loans given out by entities like MBSB. So, with this sort of leverage appear within the civil servants and signs of stress in their finances, do you think the sort of growth in personal loan has chance to be extended or do you think we are probably in the final furlong in terms of growth? Analysts says that the loan growth rate is churning along nicely. That is the CURRENT rate, I think loan growth will slow drastically next year. 


Will the Loan Goes Bad?

Then, there is the question of will the loan extended to these civil servants goes bad? It is probably very hard for it to go bad as they have first cut over the civil servant salary. But, BNM says the danger is that it will cause other loans extended by other institution to go bad. Now, this is a question of fairness, should the banks like CIMB, Maybank and Public Bank who are prudent with their lending be punished for some idiotic lending binge done by other institutions? By reducing the amount of disposable income, these sort of personal loan basically reduces the debt servicing capacity of other people. If the bankruptcy issue get worse, I think discussion is needed to ensure that the burden of the bankruptcy is shared among the institutions rather than having institutions like MBSB getting a cut of the civil servant salary even in the event of bankruptcy.

I am curious about the question on whether the loan can go bad? I am wondering whether the civil servant can direct ANGKASA to stop making salary deduction to MBSB? If that's the case, then, the loan can go bad and MBSB might be in deep shit in the future. If one look at the aging, under the personal financing section, there are some loans that are being impaired.  Here's the section:

If those loan were to come from salary deduction scheme, which is quite likely as all the loans they make come from that scheme.  Based on the amount impaired, unless their legacy loans have some shocking amount of bad loans to the tune of 30%, it is quite likely that some of the impaired loans is from the current scheme, which also means that, the loan has chance to go bad. All this, however, is based on the conclusion I made based on the data available. It could very well be that those impaired loan indeed is the legacy loans. Since the credit risks aging reporting is actually a new reporting standards, there are no comparable figure in the previous AR. 

Another note I would like to make is that, if one were to look at the impairment, at first glance, it seems that the size of the impairment is manageable at RM45.7m relative to the size of the loan book of RM3.9b. But, one key caveat in analyzing super-charged growth in loan book is to be aware of the problem of "growth can mask problems". Loans do not grow bad that early. Normally, people will try to make loans repayment until they seriously could not afford it. So, there is always a time lag between the time when the loan is made and the time the loan goes bad. As the personal loan book of MBSB has expanded 11.7x, yup, it is 1170% within 3 years, the stunning growth in the denominator can masks the problem of bad loans because the denominator is growing faster than the loan could get bad. If we assume that it take 2 years for the loan to go bad, it means that, the loan extended in 2008 is growing bad at a rate of 13.3%. Not exactly a very healty rate. If the current loan book goes bad at 13.3%, it means that the entire pre-rights issue equity of MBSB will be wiped off, MBSB will be in a technical bankruptcy. Luckily, they did a rights issue worth RM500mil, so they won't be in a technical bankruptcy if loans goes bad at 13.3%. Obviously, the 2 year period is a number that I plucked from thin air, I do not know the actual figure or have any experience to know what is the usual number. If the duration is shorter, then, the loan book is on a better shape. If the duration is longer, the loan book is on a worse shape and MBSB will need a bail out from the government.

I actually have some more stuff to say about MBSB. This post is a bit too long and it may take some time for you to digest the information. So, I will stop here. Will do a part 3 on MBSB later touching on their weak risk management skill.

MBSB: The Amazing Credit Expansion to Civil Servants- Part 1A

This post is to correct some numbers that I presented in the previous post on MBSB. Yes, one deleted post and another post to correct another mistake in a week did no good to the credibility of this blog. But, if I did not correct this mistake and misinformation, it will make this blog similar to the newspaper that I always make fun of, a newspaper that "copy" their tagline from the Korea Tourism Organization. 

Fellow blogger hishamh of econsmalaysia lead me to a report known as "The Financial Stability and Payment Systems Report" published by BNM. I did not know that this report actually existed. Shows how little I know. Hat tip to hishamh for the report :-) In it, it shows the breakdown of Bank Rakyat and BSN consumer credits figure. Sigh..it would have save me the hassle of downloading all the banks annual report if I knew this report existed.The Bank Rakyat figure is further broken down to member and non-member. I subsequently found out that, cooperatives only can lend from the member portion. So, I mistakenly added RM17b to the Bank Rakyat figure. So, here's the figure without the RM17b.

Gross Loan Ammended

Average Loan Corrected

So, the average loan per civil servant stands at RM25.7k. This is based on the assumption that all personal loans are extended to civil servants, which is not that far from reality because most of their products is targeted at them due to their relatively lower risks.

For a system basis, the report also provide the figure of total consumer credit provided by the Development Financial Institutions (DFIs) i.e. your Bank Rakyat and BSN and etc. It includes loans that are extended to non-civil servants but do not include loans extended by MBSB as it is not a DFI. Here's the table:

DFI Consumption Credit

The amount nearly triple from RM14.7b to RM42.8b. The report have another chart on the contributors of household debts.

As you can see from the chart, personal loans have been the second largest contributor to the growth of household debts. This is disproportion to the size of the personal loan component relative to the size of total household debt. I would like to add another chart that shows how the personal loan component is getting larger over time, but, need to respect BNM copyright. Cannot steal too many charts from them. If you are interested, please download the report here.

Luckily BNM is aware of the problem and are taking pre-emptive measures to tackle the risks. Here's what they say:

While a large fraction of household borrowings is collateralised (45.3% was for the purchase of residential properties), personal financing has increased significantly in recent periods. In 2010, outstanding personal financing grew by 17.5% to account for 14.6% of household debt (2006: 9.6%). Development financial institutions (DFIs), cooperatives and building societies accounted for the bulk of this growth, with almost 80% granted under salary deduction chemes. Given the salary deduction feature, credit assessments by these institutions are mostly limited to a reliance on incomplete computations of debt-servicing ratios, which are applied for the purpose of qualifying for the salary deduction facility. The absence of robust credit and affordability assessments will result in households being more at risk of becoming over-indebted, while the risk of defaulting on financing obligations, including those obtained from other banking institutions, will be higher for borrowers who have over-borrowed.

They also said that:

The enforcement of responsible lending practices will act to counter overly aggressive behaviours by financial institutions. Nonetheless, the growing influence and significance of non-bank lenders will need to be managed to avoid excessive build-up of leverage among certain borrower segments. 

 and;

The Bank will also closely monitor the growing presence of, and coordinate with relevant agencies responsible for non-bank financiers, to ensure that their activities do not substantially increase household leverage; 

This means that the crazy growth rate of MBSB Personal loans (at times >100% p.a.) will be over. MBSB need to find other growth avenue rather than preying on civil servants to take up enormous amount of debt beyond their capacity. 

P.S.: Someone from some forum posted the link to this blog post. He/she also said that he sold his position in MBSB due to the strong run up. Please read my blog post properly, I did not say anything bad about MBSB as of now. I have not even talked about MBSB in detail yet. I did not say that their loans will go bad. In fact, I said that their loans is very hard to go bad. When MBSB get the salary before the borrower did, how can the loan go bad?  I am more concern about the over indebtedness of our civil servants. When you are deep in debt, you tend to do some silly things for money, things that may make you compromise your ethical standards.

MBSB : The Amazing Credit Expansion to Civil Servants- Part 1

I made a major and embarrassing mistake on my previous post on EPF. I have deleted that particular post. If I correct that mistake, the EPF loan portfolio will be worst. EPF basically practices a policy that consolidate subsidiaries but not associate. I found out that they do not consolidate RHB Capital, so, I assume EPF practices no consolidation at all. But, they actually consolidate their subsidiaries, so they consolidate Malaysia Building Society Bhd (MBSB). All the personal loan is from MBSB consolidated books. 

This lead me to today post. This is not a post that talked about EPF loan portfolio, that will be a post for another day. This will be a post on the "Personal loan" by MBSB and all the other organizations involve in a loan scheme to civil servants known as "Direct Deduction Lending Scheme". The scale of this loan scheme is crazily huge. It is so huge that, I think I may have made a mistake. I checked for a couple of times and found out that I indeed did not miss any zeros. The numbers is really that big. 

How big? It is so big that it is twice the size of the "personal loan" extended by our banking system - that is your regular banks like CIMB, Public Bank, Maybank and etc. It is so huge that it will increase our household debt by 10% and all these 10% increase of our outstanding household loan (which include your housing loan) focuses on labour force from one sector- the civil service. By adding the size of these personal loans to the existing personal loan in our banking system, it will make the size of our personal loan market 63% the size of our hire-purchase passenger cars market. You may ask, "How can such a big loan to not be included in BNM data? You must have made a mistake.". Yeah, that's the question I asked myself too when I compare the size of lending under this scheme to the total size of our personal loan market as stated by BNM Monthly Statistical Bulletin. The size of this lending scheme is twice the amount stated by BNM statistics. So, I must have added my amount wrongly right? I checked and I did not add it wrongly. I subsequently found out that, despite the lending is done by institutions with the word "Bank" on their name, they are apparently not on the list of banking institutions defined by BNM. 

What is Direct Deduction Lending?

Direct deduction lending is basically a personal loan scheme offered to civil servants that reduces collection problem by ensuring that the lender received their monthly installments before the civil servant get their salary. It is similar to the scheme operated by RCE Capital with some minor differences. Now, anyone with certain amount of skepticism would know that RCE Capital business model would face some problem before they actually face the problem they are facing now. You can't run a business model that is based upon screwing your customer (16% effective interest rate lending, if that's not screwing your customer, what is?) and expect the business model to sustain and last. Sooner or later, your business model will face some trouble. You can only run a business model that based upon screwing your customer if it involve a certain kind of addiction like gambling (a form of private tax levy on stupid people) and tobacco. Even if it involve addiction, you may still face problem like the class-action suit that hit tobacco firms in US. RCE Capital do not have the "addiction" factor in its business model, so, it faces problem. So, the loan offered under direct deduction lending, is generally less expensive than the one offered by RCE Capital.

AMReseach did a good job detailing the Direct Deduction Lending scheme with their initiating coverage report on the smallest player on that space- MBSB. I learnt most of the mechanics on the scheme from that report. If you are interested, please look up a report titled "MBSB-In a Sweet Spot" on 30th March 2011. Here's a good graphic in the report:

If you remember your Form 3 Kemahiran Hidup, ANGKASA is basically the umbrella organization for all the co-operatives in Malaysia. A lot of these co-operatives members are civil servants. Personal Loan, intially is a high risks loan as it did not have any collateral. So, if the borrowers do not repay your loan, the banks could not sell any of the borrower assets to recoup the loan without going through a legal exercise. But, ANGKASA acts as the collection agent for the lending institution ( Bank Rakyat, Bank Simpanan Nasional, Agro Bank and MBSB). Mininistry of Finance will sent a portion of the civil servant salary which amounts to the monthly installment to ANGKASA for it to forward to the lending institution. So, by getting their hands on the borrower salary before it gets to the borrower, the collection risks is reduced significantly. It makes an inherently risky loan much less risky. The only significant risks they are having are the risks of the borrower losing a job or the employers could not pay the borrower salary, which is substantially lower in civil service. 

The Size of the Lending

It is hard to estimate the size of this lending scheme as most of the institution does not break it out. So, I just add up the portion known as “Consumption Credit” that is provided in their annual report. There is also a “Personal loans” section provided in the annual report but the numbers tend to be higher, so, I take the lower number. Most of the personal financing option in these organizations is targeted at the civil servant with the minority targeted at staff of GLCs as well as medical doctors. You can look at the financing options here: Bank Rakyat, BSN, Agro Bank and MBSB. The estimate does not include one of the lending institution- Agro Bank as I do not understand their annual report. Here are the estimates:

Gross Loan via DDL

As at 31 Dec 2010, the outstanding DDL loan portfolio hit a size of RM50.9b, more than triple from the RM16.7b level recorded in 2006 at a compounded growth rate of 32% per annum. As a comparative figure, the banking system which consists of your regular Maybank, CIMB, Public Bank and foreign ones like Citibank as well as the Islamic banks only lent out RM22.6b of personal loans. So, these three obscure institutions lend out 2.2x more than our entire banking system. However, we must take note that these three institutions, historically has a much larger personal loan book than the banking system as a whole. In fact, the personal loan book of the banking institution manages to quadruple within the same time frame, albeit starting at a much lower base. Most of the increase came from the Islamic banking sector who manages to astonishingly increase their personal loan book by almost 6x within 4 short years.  If one looked at the islamic banks personal financing products, they offer similar products targeting civil servants. The concertrated nature of these loan is indeed disturbing. Here's the Average DDL Loan Per Civil Servant:

Average Loan per Civil Servant

Please take note that the chart is not from any official source. I just combine those data. As the chart shows, civil servant owe an average of RM40k via DDL financing scheme. However, this number may be overstated as we do not know how much of the outstanding loans are DDL scheme. Bank Rakyat first talked about these sort of loans in 2006. So, I stripped off all the outstanding loan in 2006 to tone down the number (not exactly a smart way of doing things, but, I can't think of a better one. Any suggestions?). Here's the number stripping off 2006 loans:

Average Loan Ex 2006

By stripping off 2006 loans, we get a loan of RM27k per civil servant. Still a very significant amount. The real number may be between these two number. Remember these are personal loans, loans that are used to buy the latest LG Flicker Free Cinema TV, renovate the house, get a nice wedding, go to a nice holiday in Europe and etc. All these are spent on useless stuff.

The stimulus effect of all these loan hitting the market in 2010 is akin to Najib announcing a 4 months bonus to the civil servants. Market economists talked about the stimulus effect of one month bonus, the effect of these loan is 4 months! From 2007-2010, the stimulus effect is equivalent to Najib announcing a 11 months bonus to the civil servant. So, 10% of our workforce basically front-loaded almost one year of discretionary spending within the 4 year period. The only different between a real bonus announced by Najib and these DDL loans is that, this one, the people have to pay back.

The AmReseach analyst who publishes the rather complete report estimated that the potential size of these civil servant personal loan market to be around RM127.5b. I hope for the sake of these civil servants, the huge market size would never be reach. Her estimates is probably a bit too optimistic and aggressive as loan of that size would be around 20% of our GDP. She is estimating that each civil servant would take up a personal loan worth RM106k each. This is on top of housing loan and hire purchase loan for cars. I think the market is probably reaching saturation point at the current moment as the total numbers of personal loans extended to the civil servants is probably larger than the number indicated here. The numbers here do not include : i) the agro bank figure ii) Other institutions lending under an indirect scheme like RCE Capital and iii) Loans from Islamic banks that target at the same segment.

A typical DDL lending scheme may allowed up to 60% salary deduction, that is, you can borrow up to 60% of your cash flow. This is a crazy number for a personal loan. The average number for a HOUSING loan is around 30% in Malaysia. That's mean the maximum limit that one can borrow for a personal loan under the DDL scheme is twice that of a housing loan. The DDL housing scheme also allow people to borrow up to have 20 years of repayment. Judging by the maturity profile of the loans, it seems that a lot of the people took up the option of repayment period in excess of 5 years. How long is the actual repayment? We would never know unless the institutions disclose their loan book. These sort of scheme also target pensioners. Yes, pensioners!

Despite all these scary figure, as long as our government remain solvent, all these loan would not go bad. My key concern is that, by front-loading their purchase, quite a significant number of our household will have their purchasing power reduced resulting in slower consumer consumption growth in the future. It is also likely that some of these civil servants will have very little savings due to reckless spending. When they get old, they will struggle to survive on their pension. They will demand for increase in pension due to their reckless spending. In the end, who pick up the tab? The tax payers.

One key question that I would like to asked is, normally, a good employer would not allow his/her employee to got into deep debt troubles. So, my question is, which dickhead in JPA allow this sort of lending to be targeted at his/her subordinates? They allowed predatory lending by RCE Capital (16% effective interest). They allowed institutions like BSN and Bank Rakyat to offers endless amount of loan to the civil servant. This thing must end before it get worse.

On the next part, I will profile MBSB. The management of MBSB is probably doing good stuff. But, their risk management skill is a bit weak. When you are running a highly levered financial institutions, you always manage your banks based on fat tail risks. The management at MBSB cut off the fat tail, focuses on steady-state as if the world would not face another crisis. Till the next series.

P.S.: Despite writing such a long piece, I may indeed be wrong due to the sheer size of the lending. Correct me if I am wrong. I do wish I am wrong due to the crazy credits binge. What I did is just adding across all the financing as disclosed by their annual report. It could also be that, the amount taken by these civil servant is used to purchase house and cars, a more proper usage of loans. But, I thought there are housing loans provided by the government. Would like to hear from civil servants with experience with these sort of lending.

I Smell Something Fishy with EPF Personal Loans

This post is deleted. I made a major mistake due to some oversight. This is embarrassing. Clarifications will come out soon. But, facts remains. EPF loan book looked worst with this mistake. At the meantime, go to my intial post: The Good and The Bad of EPF Accounts.

Very sorry for those who have "Like" this post. Mistake made, but, things remain the same, their loan book is worst than initially thought.

The Good and The Bad of EPF Accounts

The idea for this post came from P.Gunasegaram latest article which mentioned that RHB Capital apparently has been given a lot of businesses from EPF since it taken over by them. So, I downloaded their annual report (credits to EPF for coming up with an English version). To be honest, I am quite impress with the level of disclosure. There are some useless and meaningless information, but, I blame the auditors rather than EPF.To cut the story short, I can't find how much fees they paid to RHB Capital as they define "related party transaction" in a very narrow sense. 

I always think that we have probably more people (e.g. analysts) looking into the accounts of pariah companies like KNM and Perisai compared to some very important non-listed institution like Petronas (the unlisted parent), EPF and Khazanah. So, since I have downloaded the account, I might as well take a look into the EPF financials. I spent roughly 30 minutes looking into their accounts, so, it is not in any way an extensive detailed look into their financials. But, I do manage to find some red flags. Regulars readers would know that I am a rather critical person (sometimes I feel that I am not critical enough:-)), so, do expect more emphasis on the bad stuff compare to the good stuff. The juicy stuff come at the end of this post. So, you either jump to the end or read it till the end.

Before I proceed, please take note that the size of EPF balance sheet is RM459b. This will give you a sense of the relative size of the numbers I am writing.

Good Stuff

• Disclosure is quite detailed and transparent. The English version make it easier to understand the accounts. Seriously, some Malay accounting jargon is incomprehensible like Nilai Saksama Terlunas..wth is that..lol...
• At a glance, no aggressive strategies, do not have a big derivatives book.
• External fund manager fees is very reasonable at RM92m. As a probably unfair comparison, the Norweigian Government Pension Fund (around 5x the size of EPF) paid more to ONE Malaysian fund manager than EPF paid to all its external fund managers. In fact, I think the fund managers are underpaid.
• Equities performance is actually pretty decent. Bad investment normally include companies that are their subsidiaries, i.e. more than 50% ownership. It said something about EPF should focus on managing funds rather than managing companies.
• Not sure where to put this, it is good if you are EPF employees. EPF, I think, has one of the highest average wage in Malaysia at RM8965/mth. Please take note that this is the AVERAGE wage. EPF exec to non-exec ratio is 9:41 (18% are executives). So, the executives must be making some very good money. Please take note that this include bonuses. So, that may tone down the pay by a bit as wage bill increase by 22% from 2009 with roughly stagnant staff numbers.I am not sure why the increase in wage bill though as the majority of the out performance seems to be generated from the external fund managers. So, not sure whether should reward them that much for choosing the RIGHT fund managers. In total, EPF paid out RM572m in wages on a staff size of 5319. If they are performing, I do not mind paying for performance. 

Bad Stuff 

• A significant portion of their foreign portfolio is actually internally managed. In fact, the majority of their foreign portfolio is internally managed. I am not sure whether they have the expertise in managing foreign portfolio. It is one thing investing in Bursa, totally different thing to invest in other countries.
• Their investment holdings are shown as fair value, without showing the cost base. This will prevent us from judging the performance of each categories. Due to accounting classification, some increase and decrease in value may not gone through P&L, so, it is possible that the good profits has already been milked, leaving only the bad stuff. It is however, better than some PNB books which shows investment in cost basis only. I am being told that the reason PNB is showing their investment in cost basis is due to some SC regulations on fixed price fund. So, no complains there.

Very Bad Stuff- Questionable Loans, Advances and Financing

This item deserve a special section due to its massive size as well as poor performance. The annual report discloses an item known as loans, advances and financing which is really a mixture of bad stuff that is on a gross basis amount to RM97.5b and RM 93.7b on a net basis (roughly 21% and 20% of the size of EPF balance sheet respectively).  Here's a detailed breakdown of the bad stuff (Click on the table to have a better view) :

Regular readers would know that I am very critical of the use of quasi-government entity to further government causes. This is why I am so against the PLUS takeover by EPF. PLUS, in its original toll deal, is a fantastic assets. But, PLUS, in a new, less profitable toll deal, may not be the fantastic assets that it used to be. So, after the takeover, the value of PLUS will decrease. EPF member will suffer from the diminution of their asset value without even knowing it. Instead of charging based on those who use the toll, part of the wealth of EPF members, which mainly consist of employees, will be transferred to the employers through the reduction of transportation cost to the latter without any signs of price reduction. Another example of the poor subsidizing the rich. But, on a more important note, I am against the deal because, once the moral threshold is cross once, it is easier to cross it for the second time. It is like it is easier to lie for the second time compare to your first time. It may set the precedent for any government, be it PR or BN, to have seemingly unlimited spending power to buy up IPPs and Water Companies to change their screw up agreements.

If you take a look at the table, it has RM82.8b in guaranteed loans. What loan they are guaranteeing that is at such a massive size? Is it other quasi-government entities with lesser credit strength? Do we charge a decent rate for that guarantee? Then, take a look at some other items. What the heck they are doing in providing housing loans for housing programs? It smell government initiative to me. Then, on the islamic loan breakdown, there is one item known as "personal loan" worth RM3.9b, up from RM1.3b in 2009 and RM341m in 2008. Is EPF in the business of providing personal loan? Who is on the receiving end of this personal loan? Is EPF some sort of ATM machine for some person?  EPF members may be interested in borrowing these personal loan from EPF as part of the interest may go back to themselves. It is like you feel good losing in a Genting casino if you are a Genting shareholder. EPF should stick to managing funds rather than be in the business of advancing government interest.

All this loan would be still okay if the loan is good. Due to financial disclosure standards, they have to disclose the credit quality of all the loans they have given out at about the end of the annual report. So, those who are not familiar may not catch this as we need a side-by-side comparison. Here's the credit quality disclosure ( Click on the picture to have a better view. Focus on the highlighted part)

At first glance, it seems that all this loan are good loans as it is under the "Strong" category which stands for non-sovereign bonds listed AA and above. On an unrelated note, the categorization based on sovereign and non-sovereign bond is misleading. A sovereign bond may be a bad bond if it is issued by Greece, a non-sovereign is a good bond if it is issued by Microsoft. We may not know if EPF is holding some Greece exposure and put it under sovereign section to signal high quality. Back to the topic, if we look strictly at this disclosure, we may thought that the loan extended is good loans. But, if we look properly, around RM82b of bonds is classified as strong. The size of loans extended with EPF guarantee is also around RM82b. In other words, these loan are rated highly by the rating agencies because they receive an EPF guarantee. If EPF do not guarantee such loan, these may be shit loan. So, the credit rating do not reflect the quality of the loan portfolio that EPF is holding. This credit quality disclosure is misleading. (See corrections below)

If we analyse this loan portfolio on a different method. A very scary picture will emerge. EPF discloses the aging of this loan portfolio. The aging is shown below (Click on the picture to have a better view. Focus on the highlighted part) :

The aging analysis is on a net basis. So, it do not include the already impaired loan. If we take a look at the gross loan to impaired loan ratio based on the numbers in Table 2, RM 5 bil of the loan is impaired or a ratio of 5.1%. This is a shockingly high figure. As a relative comparison, the latest non-performing loan ratio in our banking system is 2.3% based on EPF financial year end.(Note: I am taking the leap of faith that NPL= Impaired Loans, there may be some technical differences between the both as NPL, I believed, do not take into account of recovery but impairment includes recovery of asset value. In any case, by taking NPL=Impaired Loans, I am being conservative. Not sure though, I am not well-verse in banks.). So, on average, the loan portfolio of EPF is around 2.2x as likely to default as a regular loan in our banking system.

This is not all, if we look at Table 3, the aging analysis. There are roughly RM9.5b of loans that is past due for more than 6 months. I do not know how long these loan are past due as comparative figure is unavailable for 2009 in the 2010 Annual report and the 2009 annual report do not disclose the item. Assuming that all this RM9.5b will not be recovered and is impaired, it will bring the impairment rate to 14.8%, a very high number.  In another words, the loan portfolio of EPF is 6.4x more likely to default than a regular loan in our banking system if we define the RM9.5b loans that are past due for more than six months as impaired (Note: If I am not mistaken, BNM definition of NPL is more stringent by classifying non-payment of interest and principal of more than 3 months as NPL. So, I am being conservative again).

With 5.1% of impaired loan and 14.8% if we include past due loan of more than 6 month, this do not seems to be the high investment grade AA to AAA rated loan portfolio that EPF claimed to be in its disclosure. In fact, if we based it on the 2008 S&P Corporate Default Rate (note: 2008 is a very bad year, so default rate is higher than usual. Thus, it is more conservative.), at 5.1%, the loan portfolio should be rated B to B-. At 14.8%, it should be rated between B- to C. Anything less than BBB is junk bond. So, even at 5.1%, the loan portfolio of EPF should be rated at non-investment grade, junk bond. I am not sure whether the investment charter of EPF allow them to hold junk bonds, but, surely this loan portfolio really consist of a lot of shit loan. (Note: I am again taking the leap of faith of default loan=impaired loan and past due loan in this paragraph.)

If this whole bloody loan portfolio goes bad (to be honest, this is highly unlikely), 20% of the EPF members contribution would be gone. But, if we limit the case to the RM5b impaired and the RM9.5b past due for more than 6 months, 63% of this year net profit would be gone (note: Figure is exaggerated as RM5b had already been recognize as losses but this is necessary for comparison.). EPF have a very good year in 2010 achieving record profits. So, the numbers may totally wipe off the entire year of net profit in a normal or bad year.

No matter how you spin it, this loan portfolio is one POS.

P.S.: Do inform me if I get anything wrong as I am not really familiar with banks and this is to some extend, a bit like banks.

Corrections:

1.The previous version of this blog post contain an error which state the wrong NPL ratio. Hat tip to Shihong for leading me to the mistake.

2. I think I make a mistake by asserting that the Guaranteed loans is guaranteed by EPF. If it is guaranteed by EPF, EPF should record a liability. Since no liability is recorded, the loans are not guaranteed by EPF. But, I wonder what entity in Malaysia have the ability to Guarantee RM82b of loans.Is it our government? But, the default rate indicates it is not government. So, who is guaranteeing such accounts. Regardless of that, I stick with my comments on the quality of the loan portfolio of EPF based on their high default rates.

3. Upon further investigation, the personal loan and housing loan are provided to their staff as a perk on top of their relatively high salary. But, the average loan size per staff is indeed huge at an average of RM1.5mil per staff. I am not sure many Malaysian (apart from those of upper middle class) can have such a big outstanding housing loan. If this is loan to the staff, it means that credit quality would be good as repayment can be deducted from salary. It also means that, the default rate of the remaining pool is much higher, the quality is worse.

When Independent Director-cum-Auditor Talks Cock...

Regular readers of this blog (yes, there are actually people that read this blog although not many) would know that I am accounting-trained. Regular readers of this blog would also know that I have very little respect for auditors and accountants. Auditors, as a profession, seems to get away with most flak. When a company collapses, it is always the management fault. It is also the fault of the investment bankers, the analysts, the fund managers and the regular retail investors. But, as usual, no criticism was leveled on the auditors, the one that supposed to ensure the company viability as a going-concern. Auditors, as a profession, is filled with people of questionable intelligence, but try to make themselves look smart with all sort of jargons. Auditors, as a profession, also teaches future auditors that they are not responsible for any sort of crap that happened. Auditors, as a profession, thinks that shareholder lawsuits against them is bad for the industry, that they are god-like and should never be sued. Auditors, over the years, have perfected the art of responsibility avoidance.

So, when one Independent Non-Executive Directors (INED) and Chartered Accountant of Golden Plus Bhd ("Gplus" hereafter) writes to the Star to defend himself and his peers, it is filled with the "responsibility avoidance" tone that plague the industry. Read his full letter here : Harsh fines for non-executive indepenent directors. According to the annual reports of Gplus, the author apparently is a corporate governance expert. But, the things he says make non-corporate governance expert like me shudder. The author is also a fraud expert. The author also did some stint with KPMG UK, Singapore and Malaysia.

So, here is what he says:

To subject these directors to such hefty fines and penalties seem rather harsh, more so when they are not in any position to control events, which are mainly the domain of the executives. The members of the audit committee and in particular, the audit committee chairman, are there by reason of a Bursa Malaysia listing requirement. At least one of them must be a member of the Malaysian Institute of Accountants (MIA).

Oh, you mean you are there just to help some strangers fulfilled its Bursa Malaysia listing requirements? You really very good people lo... Or...Did you do it for the business contacts, for the business favors in return for future businesses?

They are only able to play a role of advising at directors’ meetings and/or not approving questionable acts and transactions, but are never in a position to dictate when an act is to be accomplished by the company, for example, the issuance of quarterly financial statements, annual audited financial statements and the like.

Hmm..did you know that you can actually resign? Plus, for all the director's experience and expertise in corporate governance, he seems to not understand our companies act and basic company law. Basically, executives are answerable to the board of directors and the board of directors, in turn, are answerable to the shareholders. So, our corporate governance "expert", is ranked higher than the management. During the time the offences is committed by Gplus, there are more INEDs than executive directors in the board. If the INEDs actually do their job properly, they can threatened to sack the management for failure to publish the account. For all his auditing experience and expertise, he seems to "forget" to do so. In addition, aren't making sure that quarterly financial statement publish on time is part of your role, as in, as a director, you should be receiving regular updates from the company. When there seems to be no updates, don't you think that you should be concern and asked the company for their apparent lack of update? You mean your job is just to attend meetings and talk cock during the meeting as well as share tips of which golf course is good?

To penalise the non-executives seem rather unfair especially if one looks at GPlus’s non-executive directors – a former senior judge, a former senior civil servant, a former Chief Police Officer and two practising accountants. In view of the enforcement actions taken by Bursa Malaysia on the GPlus directors, both accountants have had their audit licences restricted.

There appears to be no direct correlation between the ability of the relevant individuals to perform audit work for their clients and being a representative on a board, but nevertheless this is the actual sad state of affairs.

Oh, his licence get restricted, that's why he is so piss off. But, I want to ask a question. If you do not have the ability to do the job properly, why do you take it up in the first place. If directors can't be penalize, how can we ensure that they will do their job properly. Imagine murder is not punished by life sentence or death penalty, everyone will go around killing people.

I wonder what would happen if all practising members of the MIA refuse to accept any appointment as a “watchdog” for the miserly director’s fees paid. In any case, most of these practitioners don’t really need the money but do take up such board positions for a variety of reasons, including social responsibility.

First of all, if all MIA members is of the quality of the author, as a minority shareholder, I welcome and thank their decision to not accept any watchdog role. What good is a watchdog if he can't watch and bark at anything suspicious? Then, the question of miserly director's fees. According to Gplus annual report, in 2008 (the most recent figure) RM104k is paid to five INEDs, so, it is on average RM20+K per person. In 2007, RM228k is paid to the INEDs, averaging RM46k per person just to attend some board meeting. This does not include intangibles perks like potential business contacts and business deals. Perhaps, it is "miserly director's fees" to the author. But, try tell that to the Nasi Lemak Mak Cik who struggle to even earns RM20k per year to put her kids through school. Try tell that to countless of Indonesian workers who work like mad just to make roughly RM10+k per year. Yeah, RM20-46k per year to attend meeting and getting yourself reasonably updated seems to be a "miserly" pay. Yeah, you take up the role for "social responsibility", such a big sacrifice. Due to your need to be socially responsible, you decide to sacrifice some golf time to make RM20-46k.

P.S.: I am not writing this to shame anyone. That's why I am not naming names. Oh, BTW, the excessive fine that the INED is complaining about is just RM17.5k, less than what he earns for sacrificing some golf time.

Of Market Moving News and Singapore-based Media

It is just me or did anyone else feel that, most of the recent market-moving news involving some of our stocks came from Singapore-based media? The Muhibbah receivership issue, I believed, was first highlighted by Singapore Business Times. When CIMB and Maybank decided to call off RHB Capital merger, it was first reported by Singapore's Straits Times. Now, when RHB Capital apparently is considering a crazy deal to takeover CIMB, it was again being reported by Singapore's Straits Times.

It is either due to our media is grossly incompetent or our local bankers like to run to Singapore to tell their stories. I think it is the latter. Perhaps, they feel safer to disclose sensitive information to a non-Malaysian media. Our Malaysian bankers seems to be unable to keep their mouth shut. News about potential M&A regularly landed in some internet message board by people who claimed to be investment bankers and the likes. A couple of these news is proven true, a few weeks or months later. The problem with acting on such news is that, you do not know which one is real, which one is not. Now, if they can write on the message boards, it means they will also tells their friends and families to buy. So, there are probably a lot of people that benefited from insider information, at the expense of normal retail investors like us. Our SC probably do not have the resource to catch these buggers on the internet. It is also probably true that, some of our corporate figures do not seems to understand what is insider trading, like this Genting COO who settle with SC on insider trading charges. If you are acting on information that is not available to public, that is not obtained via deep and creative research but rather through some friends working on the deal is not considered insider trading, what is insider trading? Unlike the law-trained Genting COO who consider that a "market tip"-a market tip that is unfortunately unavailable to the general public- Snowball, who know nuts about law, thinks that common sense says that it is insider trading.

It is impossible for SC to regulate. So, the next best thing is to actually subscribe to these news, at least, you have some head start over those who do not. The huge fall due to the Muhibbah's APH issue only happened on the day analysts released their reports, which is a day after Singapore Business Times report on the issue. It shows that quite a number of people may not have access to the news. If the trends of going to Singapore-media to disclose sensitive information continue, one may probably needs to subscribe to these Singapore news services. My main problem is, these sort of subscription is getting unaffordable. Plus, most of the news overlaps with each other. Unlike FT and WSJ that offered me some really cheap student subscriptions, in fact, FT used to offer free subscription if you are a student, Singapore Business Times, do not have a student package. If my memory serve me right, SBT is not a good publication either. Their editorial is not exactly top notch. Gunasegaram of the Star writes better than most of them. I am not sure whether paying around RM100/year for some market moving news that may not relate to company that I own is such a good deal. Any thoughts?