MIDF Sector Research

Author: sectoranalyst   |   Latest post: Fri, 24 May 2019, 10:57 AM


Public Bank Berhad - Not Getting Left Behind in Digital Spending

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  • Within expectations, earnings growth on lower provisions
  • NII growth despite NIM compression
  • Mortgage continue to drive gross loans growth
  • Asset quality remains stable as always
  • 2nd interim dividend of 37sen. Total FY18 dividend at 39sen
  • Fine-tuning our FY19 forecast after management guidance
  • Maintain BUY with an adjusted TP of RM27.15 (from RM27.30) based on pegging FY19 BVPS to 2.4x

Within expectations. The Group FY18 net profit was within our and consensus' expectations coming in at 96.6% and 98.5% of respective full year estimates. Its net profit grew +2.2%yoy supported by lower taxation and provisions.

Provisions lower. For FY18, the Group provisions fell -16.7%yoy. This was due to the higher recoveries of impaired loans. Recovered loans and financing rose +16.8%yoy to RM252.2m.

Tepid growth for total income due to NOII drop... Total income grew +0.9%yoy, dragged by lower NOII which fell -5.0%yoy. The fall in NOII was due to lower forex profit which fell -28.8%yoy to RM243.7m. We understand that some of these forex profits are translational in nature.

...but moderated by NII and Islamic Banking income. Islamic Banking income grew +6.7%yoy while NII expanded +2.0%yoy. The NII expansion was more notable due to NIM compression. NIM was - 6bps lower in FY18 as cost of fund crept up due to deposit competition. However, NIM have inched up slightly in 4QFY18, going from 2.16% the previous quarter to 2.18%.

Mortgage continue to drive loans growth. The Group posted gross loans growth of +4.2%yoy to RM317.3b. The main driver was mortgages which grew +5.4%yoy to RM187.2b. Of this, mortgage for residential properties expanded +8.4%yoy to RM110.5b while for commercial properties, its loans book grew +1.3%yoy to RM76.7b. Corporate lending and overseas operations chipped in at +4.2%yoy to RM41.0b and +5.0%yoy to RM23.2b respectively.

Robust deposits growth. Deposits grew +6.2%yoy to RM339.2b underpinned by healthy CASA and fixed deposits growth. CASA grew +4.7%yoy to RM87.0b while fixed deposits grew +5.5%yoy to RM196.8b.

Continues to invest heavily on digital platform. The management highlighted its efforts in the digital landscape. Accordingly, it had spent RM400m on ICT capital expenditure over the past 3 years of which RM90m was for fintech initiatives. For the next 3 years, it plans to spend another RM600m with RM180m going to fintech initiative. The Group also have a fintech work group at the senior management level and a fintech & innovations department. We believe that such investments are necessary to ensure that the Group remain apace with its peers in the digital landscape. While in our opinion it is not a leader in the digital offering, it is abreast with some of its peers.

Conservative FY19 targets. The Group guided its FY19 targets of: i) ROE of 13-14%, ii) Total capital ratio of >13%, iii) GIL ratio < 1%, iv) CI ratio of 34.0-35.0%, v) Loans growth of 5% and vi) Deposit growth of 5%. We note that CI ratio guidance is slightly higher than previous years due to slight weakness in revenue. Nevertheless, we do not expect the Group will face much difficulty in achieving these targets.


Following the guidance from management, we are fine-tuning our forecast. We adjust downwards our FY19 earnings forecast by -6.6%.


We believe that the Group's main value proposition is its conservativeness which lead to the best asset quality in the industry. While this conservative approach does appear that the Group sacrifice some growth and higher yielding assets, it ensure that the is able to maintain its profitability at a steadier pace. We believe that the management conservatism bodes well for current period of external uncertainty as its stable asset quality should mean that it will be able to weather any economic shocks. Moreover, we believe that the Group will stand to benefit for being retailcentric. Therefore, we maintain our BUY call for the stock with an adjusted TP of RM27.15 (from RM27.30) due to fine-tuning of our forecast. Our TP is based on pegging FY19 BVPS to 2.4x PBV which is its 5 year historical PB multiple.

Source: MIDF Research - 21 Feb 2019

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