This article first appeared in The Edge Financial Daily on October 7, 2019 - October 13, 2019

KUALA LUMPUR: With Public Bank Bhd’s share price at a near two-year low, and below the RM20 level, the question that arises is whether it is an opportune time to pick up the stock.

Analysts note that value has emerged in Public Bank after the steep share price decline, but they also caution that the outlook for the banking sector is not good.

Fundsupermart research analyst Jerry Lee Chee Yeong said the banking sector as a whole does not appear to be a “good buy for investors given its gloomy outlook”.

He noted that Bursa Malaysia’s Finance Index has been facing downward pressure since early this year. Over the past year, the index has fallen 15.56% to 14,997.39.

“The overall outlook for the banking sector, especially for those banks that focus on traditional banking, is quite gloomy given the slowing economic growth as well as the expectation of a further OPR (overnight policy rate) cut by BNM (Bank Negara Malaysia) which is expected to impact the banks’ net interest margin,” Lee said when contacted by The Edge Financial Daily.

Phillip Capital Management Sdn Bhd chief investment officer Ang Kok Heng has a more optimistic outlook on Public Bank.

“There has seen quite a selldown in Public Bank shares. Thus, this could present an opportunity for investors to pick up the stock,” he told The Edge Financial Daily.

While he regards all listed banks attractive with each of them having their “own flavour”, Ang pointed out that Public Bank has a low risk given its relatively low level of corporate loans.

“So, in the event of a recession, they will be able to withstand it better than other banks, as they concentrate more on consumer loans,” he explained.

It is also a very well-managed company, he said, adding: “Public Bank has a very low level of non-performing loans as they are very prudent in their lending.”

Public Bank’s share price dropped below RM20 last Wednesday, and hit a 22-month low a day after. It closed unchanged last Friday at RM19.28. Year-to-date, the counter has fallen 22.13%, the smallest drop among listed banks.

The stock has stayed above the RM20-level since the end of January 2018.

Despite offering one of the lowest dividend yield at 3.63%, Ang explained that the bank pays less dividends compared with other banks as it needs to “conserve cash to boost its capital”.

Moving forward, Ang opined that the bank has to look at new ways of doing business, such as looking into digital banking.

He said bank would have to look for new sources of income to supplement the traditional businesses.

RHB Research banking analyst Fiona Leong said the valuation of Public Bank looks more appealing after the stock dropped below the RM20-level.

She added, however, that overall she would not be “terribly excited” about buying the stock, given the concerns surrounding an interest rate cut.

Leong said the fall in Public Bank’s share price could also be due to the fact that it has a higher level of foreign shareholding compared with other banks.

Bloomberg data show that 62.74% of Public Bank shares are owned by local shareholders.

According to Bloomberg, there are 16 research houses covering Public Bank, with four “buy” calls, eight “hold” ratings and four “sell”.

Only one research house has reviewed its recommendation since the stock fell below RM20.

“There is a lot of fear and concern that the central bank may reduce the interest rate one more time, and that is short-term negative for the bank,” said Ang, adding that any interest rate cut may affect banks’ short-term profit.

He also noted that the bank’s loan growth has slowed down which affects the bank’s profit outlook. “But then again, the concern about loan growth slowing down is for the whole industry,” he added.

RHB’s Leong concurred, saying that the possibility of another round of interest rate cut weakens the prospects for the banking sector.

“Increasingly, people believe that there would be a rate cut happening in November, if not by early next year,” said Leong, adding that there are concerns that there will be more than one rate cut.

In May, BNM was one of the central banks that took an early pre-emptive move to cut the OPR by 25 basis points to 3%.