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The Three Numbers That Integrate RHB Bank Berhad

Through a series of mergers and acquisitions, RHB Bank Berhad (KLSE: 1066.KL; KLSE: RHBBANK.KL) has become Malaysia’s fourth-largest financial services group. It can trace its roots to Kwong Yik Bank that started operations in 1913.

RHB Bank’s Return on Equity is on par with Malaysia’s other banks that include Malayan Banking Berhad (KLSE: 1155.KL; KLSE: MAYBANK.KL), CIMB Group Holdings (KLSE: 1023.KL; KLSE: CIMB.KL) and Hong Leong Bank (KLSE: 5819.KL; KLSE: HLBANK.KL).

With a Return on Equity of 9%, it implies that the bank generated MYR9 of bottom-line profit on every 100 ringgit of shareholder funds. The median RoE for the Malaysian market was 10.2% last year.

The bank’s high Return on Equity can be traced to its above-average Net Income Margin of 32%. It means that the bank earned MYR32 of profit on every MYR100 of revenue.

Banks in general have high Net Income Margins. It is largely due to the difference between the interest that it charges on loans and the interest it pays to depositors. In other words, the Net Interest Margin is paramount to a bank’s profits.

RHB Bank has a very low Asset Turnover. So, on the surface, banks don’t look very efficient. But this is not entirely surprising because banks have lots of assets. These are primarily made up of loans. RHB Bank’s Asset Turnover was 0.022, which is roughly the same as that of AMMB (KLSE: 1015.KL; KLSE: AMBANK.KL).

RHB Bank had Total Liabilities of MYR72.2 billion and Total Liabilities of MYR66.5 billion. That equates to a Leverage Ratio of 12.7, which is not excessively high for a bank.

By dismantling the Return on Equity for RHB Bank, it is easy to see why it integral to Malaysia. Its RoE of 9% is the product of an enviable Net Income Margin of 32%; an Asset Turnover of 0.022 and a lofty Leverage Ratio of 12.7.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.