This article first appeared in The Edge Financial Daily on October 30, 2017 - November 5, 2017

Public Bank Bhd
(Oct 27, RM20.48)
Maintain buy call with an unchanged fair value (FV) of RM22.20: We maintain our “buy” call on Public Bank Bhd (PBB) with an unchanged FV of RM22.20 per share. This is based on a target price-to-book value ratio of 2.1 times, implying a financial year 2018 (FY18) return on equity (ROE) of 14%.

We make no changes to our forecasts. PBB reported a core net profit of RM1.41 billion (+5.5% quarter-on-quarter [q-o-q]; +13.5% year-on-year [y-o-y]) for the third quarter of FY17 (3QFY17). Nine months of FY17 (9MFY17) earnings of RM3.99 billion (+7% y-o-y) were within expectations, accounting for 75.7% and 75.6% of our and consensus estimates respectively. The 9MFY17 annualised ROE was 15.1% against our expectation of 14.6% for FY17. 

Loan growth moderated in 3QFY17. The group’s loans (domestic and overseas) grew 4.5% y-o-y, slower than the first two quarters of FY17. Domestic loan growth continued to slip for the fifth consecutive quarter to 4.8% y-o-y. Annualised year-to-date growth of its loans in Malaysia remained ahead of the domestic industry’s growth rate. Overseas loan growth continued to trend lower to 1.8% y-o-y, underpinned by a slowdown in Hong Kong, China and Cambodia’s loans.

Customer deposit growth continued to be slow at 1.5% y-o-y, in line with a moderation in loan expansion. 3QFY17 saw a further softening in current account, savings account (Casa) growth to 8.9% y-o-y, resulting in a marginally lower Casa ratio of 25.5%. Liquidity improved with a lower net loan-deposit ratio of 93%.

The net interest margin (NIM) continued to be compressed, but at a milder compression of two basis points (2bps) q-o-q in 3QFY17 versus a 5bps q-o-q decline in 2QFY17. This was attributed to higher funding cost. In the near term, we expect NIM pressure from deposit competition to still exist, but to a milder extent. This was due to delays in implementation of the net stable funding ratio, which was likely to ease the pressure on banks’ funding cost. 

3QFY17 saw a smaller uptick in impaired loans by 0.8% q-o-q, compared with 2.3% q-o-q in the preceding quarter. New impaired loan formation in 3QFY17 was lower than in 2QFY17. The group’s loan loss cover stabilised at 98.2% after falling below 100% in 2QFY17. We continue to be comforted by the group’s large regulatory reserves of more than RM2 billion. 

Including regulatory reserves, loan loss cover would be above 200%. The group’s overall gross impaired-loan ratio remained steady at 0.5% versus the domestic industry’s 1.7%.

The common equity tier 1 ratio was 11.7% at the group level. No dividend was proposed for 3QFY17. — AmInvestment Bank Bhd, Oct 27