This article first appeared in The Edge Financial Daily, on April 22, 2016.

Public Bank Bhd
(April 21, RM19.10)
Maintain buy with a target price (TP) of RM21.80: Public Bank Bhd (PBB) reported a first financial quarter ended March 31, 2016 (1QFY16) net profit of RM1.3 billion (+5% year-on-year [y-o-y]), which is within our and market’s expectations.

Operating income was largely in line with our estimate, underpinned by robust non-interest income growth (+12.4% y-o-y), driven by exceptionally strong foreign-exchange (forex) income (+77.6% y-o-y), fees and unit trust income; and a 10% growth in fund-based income, with net interest margin (NIM) staying flat y-o-y at 2.2%. Meanwhile, lower impaired loan allowances (-11% y-o-y) resulted in an annualised net credit cost of 10 basis points (bps), outperforming our forecast of 18bps for 2016, as we did not factor in recoveries.

The increase in operating expenses (+12.2% y-o-y) has resulted in an uptick of 50bps y-o-y in 1QFY16 cost-to-income ratio to 31.5%. On a quarter-on-quarter (q-o-q) basis, core net profit declined by 11.2% due to a sharp credit recovery in 4QFY15 and a 5.3% q-o-q increase in overheads. Though operating income is still holding up well q-o-q, our 2016 forecasts have taken into account a potential moderation in earnings driven by NIM compression and slower loan growth.

PBB’s loans saw an annualised growth rate of 8.4% (5.5% after including effect of forex translation) versus industry growth of 2% and an annualised growth rate of 10.1% for deposits (7.3% after including effect of forex translation) compared to an industry contraction. In order to counter a potential moderation in earnings driven by slower future loan growth and potential NIM compression, management reiterated plans to boost non-interest income growth via sales of unit trusts, structured products and increasing sources of fee income.

Maintain “buy” on PBB, with a 12-month TP of RM21.80, at a 2.5 times price-to-book value multiple on a 2016 return on equity of 14.5%.  — Affin Hwang Capital, April 21