This article first appeared in The Edge Financial Daily, on March 29, 2016.

KUALA LUMPUR: Public Bank Bhd is looking at upping its fee-based income to help buck the trend of declining net interest margin (NIM) and net return on equity (ROE) due to fierce competition in the financial year ending Dec 31, 2016 (FY16).

Managing director cum chief executive officer Tan Sri Tay Ah Lek said fee-based income is important because it is low capital-intensive and has very low capital charge.

A bank’s fee-based income is usually derived from the unit trust businesses, foreign-exchange transactions and fee income from banking operations.

“To increase fee-based income, the group will further enhance its cross-selling activities, [and] leverage on the group’s brand and its superior customer service. Going forward, Public Bank is targeting to sustain its positive growth momentum in the operational fee income,” he said during the group’s 50th annual general meeting yesterday.

The upcoming challenges in FY16 notwithstanding, Tay reiterated that Public Bank’s current strategy is not cost reduction, but cost efficiency and productivity optimisation to ensure that everything is running at its optimum level.

Therefore, he said Public Bank’s targeted net ROE will continue to be above 15% for FY16.

“The industry’s ROEs are all trending down because of two main reasons: One is we always have to gradually build up our capital base by retaining the profits, just to meet the stringent capital requirement from the Basel III; [secondly, it’s] also because of the NIM. [It is] not only us, but the industry as a whole. We expect it (NIM) to continue to be squeezed, due to competition,” he explained.

“Not only because of competition for loans, and also managing the cost of deposits, which is trending up. Having said that, our ROE remains relatively high compared to the industry average of 8% to 9%. Last year, we [achieved] 17.8%,” he added.

Other than ROE, Public Bank’s 2016 targeted key performance indices include a gross loan growth of up to 9%; customer deposits’ growth of up to 8%; gross impaired loan ratio to remain contained at less than 1%; and keeping cost-to-income (CTI) ratio below 33%.

Notably, Public Bank, which is also the nation’s third-largest bank, had a CTI ratio of 30.5% in FY15, the lowest among its industry peers.

The bank’s founder and chairman Tan Sri Teh Hong Piow, 86, commented that the group is well positioned to ensure compliance with the more stringent requirements of the Basel III capital framework, including any additional capital buffer to be introduced by Bank Negara Malaysia.

“Through the group’s banking business, the group serves retail consumers and small and medium enterprises, and promote economic as well as social development by encouraging savings and mobilising funds towards the development of trade and commerce,” Teh added.

Public Bank shares closed six sen or 0.32% higher at RM18.58 yesterday, giving it a market capitalisation of RM71.75 billion.