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Author: kltrader   |   Latest post: Mon, 27 May 2019, 10:38 AM


Summarizing Public Bank’s 3Q18 Results

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Macquarie Equities Research (MQ Research) wrote a report on Public Bank following the release of its 3Q18 results yesterday. Highlights include its net earnings dropping a slight 1.5% year-on-year (YOY) to RM1.38b, due to absence of a one-off disposal gain in the previous year, and no 3Q18 dividend was announced or expected. Yesterday, Public Bank’s share price snapped its 3-day losing streak, rebounding 0.1% to RM24.90.

MQ Research recommends switching to Maybank or RHB Bank.


  • Public Bank reported 3Q results; net earnings of RM1.38bn (-1.5% YoY, -0.9% vs. 2Q18) takes year-to-date (YTD) 3Q18 earnings to RM4.19bn (+5%) which is 73% of consensus FY18E earnings forecast of RM5.74bn; this ratio would be a lower 93% if adjusted for tax overprovision / deferrals totaling RM99m YTD i.e. effective tax rate was 20.2% (YTD 3Q17: 21.7%). No 3Q dividend was announced or expected; note in 2Q18, an interim dividend of 32 sen or 44% payout was announced (1H17: 27 sen, 40%; MQ18E: 50%).
  • Key takeaways: headwinds articulated in MQ Research’s April downgrade note continue to weigh, converging on management’s revised FY18 loan growth guidance (during 2Q reporting) of 4% - 5%, from 5% (YTD 3Q18: 4.4% annualised, a widening gap with the sector’s faster 5.4%), and moderated net interest margin (NIM) guidance, to low-mid single digit contraction (expansion previously) i.e. YTD 3Q18 NIM is 2.24%, -4bps vs. FY17’s 2.28%. Loan growth is hobbled by heavy exposure to the struggling broad property sector (62% of loan book) while Public Bank is missing out on working capital recovery (13% of book vs. 32% for Maybank). YTD sector-best cost-income ratio (CIR; 33.0%) and credit cost (6bps) highlight little room for offsetting gains elsewhere.


  • Operating income: annualised domestic loan growth at 4.4% (group: 4.4%) lagged the sector (5.4%) for a third straight quarter, with the softness to extending to FY19 given weak property market indicators e.g. Aug 18 sector mortgage loan growth of 8.2% YoY the slowest since 2009. NIM pressures (-8bps vs. 2Q) due to rising funding costs related to price competition for retail deposits is expected to extend. But YTD net interest income growth (+2.8%) still outpaced non-interest income (flat) as 6% YTD growth in Public Mutual unit trust income (42% of total) was mitigated by week trading / forex income.
  • Operational expenditure and credit costs: the above weak operating income growth (+2.2% YTD) means that despite continued strong operational expenditure containment – YTD 3Q18 CIR of 33.0% is at the low end of the targeted 33%-34% range – Public Bank reported negative jaws YTD i.e. operational expenditure growth was a faster 2.8%, resulting in YTD Pre-Provision Operating Profit (PPOP) growth of a marginal 1.9%. MQ Research continues to flag that Public Bank remains the only bank not to articulate a digital strategy, with IT spend continuing to average a quarter of peers as a % of operational expenditure – addressing this gap would lift CIR by an estimated 150bps. YTD 3Q18 credit cost was lower, at c.17bps (YTD 3Q17: c.24bps) – gross non-performing loan (NPL) ratio is unchanged at 0.5% and post-MFRS 9 loan loss coverage is at a sector-topping 110% (236% if including regulatory reserve).
  • Capital, dividends: post-interim dividend common equity tier 1 ratio is a comfortable 12.6%. While MQ18E 50% earnings payout is higher than the guided mid-40s, weak asset growth means higher dividends will be needed (in line with sector) to keep ROE at the upper-end of the targeted 14-15% range (YTD: 14.7%).

Action and Recommendation

Maintain Neutral rating. Sharply-decelerated loan growth, pressured net income margin and optimised operating ratios mean Public Bank’s extended earnings outperformance is ending.

Structural headwinds re retail loan demand and broadly reinvigorated competition will restrain operating income even as operational expenditure rises, especially re addressing low IT spend.

Per negative return on equity trend divergence vs. peers, Asia-topping premium valuations have peaked. Switch to Maybank or RHB Bank.

Source: Macquarie Research - 26 Oct 2018

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