• Upgrade to BUY from Neutral, new MYR4.80 TP from MYR4.70, 16% upside with c.5% FY24F yield. We believe recent events such as the escalation of tensions in the Middle East and shift in US Federal Funds (FFR) rate expectations, coupled with the upcoming US presidential election will likely lead to increased market volatility. Amid such a scenario, we are tactically upgrading our call for Public Bank as we see room for a big-cap, defensive, quality name in investors’ portfolios to tide through the volatility. Fundamentally, the group’s growth prospects have not changed, in our view.

• Five reasons for our upgrade: i) Earnings safety. PBK’s domestic-driven earnings with stable drivers offer investors good earnings predictability; ii) the stock’s underperformance vs FBM KLCI by 9% YTD. Focus could turn to laggards as volatility rises; iii) valuations – PBK is trading at 11.6x 2024F PE and 1.4x 2024F P/BV, ie close to the mid-point of -1SD and -2SD levels; iv) low foreign shareholding – this is now at 25.4% vs the recent multi-year low of 25.1% at end-Oct 2023; and v) it being a liquid, big-cap stock.

• Loan demand – so far, so good on the consumer front. PBK had guided for 2024 loan growth of 5-6%, with key drivers being housing loans (c. 6%), auto (5-6%) and SME (mid-single digit rate). We understand that growth for mortgages is holding up well, backed by a solid approval pipeline that is up c.7% YoY at end-2023. Meanwhile, auto loans have been well supported by the robust TIV YTD (2M TIV: +13% YoY), but management was unsure how long this can be sustained. PBK thinks the demand for big-ticket items has been partly buoyed by improved sentiment, as well as factors such as pent- up demand for properties. For SMEs, PBK is now more comfortable to grow the segment at a faster clip (2023 SME loan growth: +1% YoY) but stressed this would not be at the expense of asset quality.

• NIM pressure – a slow burn? New mortgage rates remain competitively priced in the market, at 3.8-4%. Similarly, given that most banks are focused on the SME segment, PBK said pricing in this segment has also been competitive. However, the impact to yields and NIMs will not be immediate but, instead, felt over time unlike deposit price competition. That said, deposit price discipline seems to have held up. PBK had reduced its promotional and board fixed deposit (FD) rates by 5-10bps in March and saw some peers similarly lower their FD rates. PBK guided for a stable-to-single- digit NIM squeeze, which it has kept to for now.

• Asset quality – domestic segment still holding up while the Hong Kong book has stabilised. That said, there has been some uptick in GIL from Vietnam, but the book there is small. While asset quality has remained intact, the recent global situation is likely to push back any potential provision writebacks.

• Earnings forecasts broadly retained. However, we raise our TP to MYR4.80 from MYR4.70 after ascribing a new 2% ESG premium (vs 2% discount previously) following an update to our ESG scorecard post-release of PBK’s Sustainability Report 2023.

Source: RHB Research - 19 Apr 2024