Investment Highlights

• We are downgrading our call on Public Bank (PBB) to HOLD from BUY with a lower fair value of RM25.60/share from RM26.00/share. We trim our earnings for FY19/20 by 0.4%/1.4% after imputing higher NIM compression and raising our CI ratio assumptions. This resulted in a lower projected FY19 ROE of 13.5% (previously: 14.1%) leading to a P/BV of 2.3x. We expect mortgage loan growth to moderate in FY19 as the property market is expected to remain soft. This, coupled with compression in NIM, is expected to result in a modest topline growth for FY19.

• The group recorded a core net profit of RM1.41bil (+1.6%QoQ) in 4QFY18. This brought 12MFY18 earnings to RM5.59bil, which grew modestly by 2.2%YoY. Total income growth was flat as it rose only by 0.9%YoY due to lower non-interest income (NOII). Softer income, coupled with higher opex growth of 4.2%YoY, led to an increase in the group’s CI ratio to 33.0% for FY18 (FY17: 31.9%).

• 12MFY18 net profit came in within expectations, accounting for 101.5% and 98.5% of our and consensus estimates respectively.

• Growth in the group’s NOII declined by 5.0%YoY for FY18 was dragged by non-operational FX losses.

• For the full FY18, its loans grew 4.2%YoY, and was below our assumption of 5.0% expansion.

• The group’s deposits accelerated to 6.2%YoY in 4QFY18 vs. 3.8%YoY in 3QFY18. CASA ratio remained stable at 25.7%. Meanwhile, its net LD ratio inched lower to 93.0%.

• NIM shrank by 6bps to 2.22% owing to higher funding cost which was in line with management’s guidance. Management is guiding for mid-single digit compression on the groups’ NIM for FY19 mainly due to pressure on funding cost.

• The group continued to record a low GIL ratio of 0.5%, well below the domestic industry's 1.5%. With its regulatory reserves of RM1.81bil, loan loss cover remained high at 237.5%.

• Credit cost in 12FY18 of 0.05% was lower than our estimate of 0.10% for FY18.

• A second interim dividend of 37 sen/share was declared, leading to a total FY18 dividends of 69 sen/share (payout: 47.9%), higher compared with FY17’s 61 sen/share.

Source: AmInvest Research - 21 Feb 2019