Investment Highlights

• We are maintaining our BUY call on Public Bank (PBB) with an unchanged fair value of RM25.00/share. Our valuation is based on FY20 P/BV of 2.1x supported by an ROE of 13.2%. We fine-tune our FY19 earnings by -0.2% as we raised our CI ratio assumption to 34.0% from 33.0% previously while lowering our credit cost assumption to 5bps.

• We met PBB chief operating officer Chang Siew Yen recently for updates. We understand that in April 2019, approvals for mortgage loans have improved slightly as the home ownership campaigns’ rebates and incentives have stimulated some buying interest on residential properties.

• Competition for SME loans remains intense. Even though other banks have been more aggressive on SME loans, the group does not intend to compete solely on pricing. It remains prudent, adopting a risk-based pricing approach on loans. We project the group to achieve a loan growth of 4.5% for FY19 against its target of 5.0%.

• On the recent OPR cut of 25bps in May 2019, this will impact its FY19 NIM by 3–4bps. The group is now guiding for 8–9bps compression vs. a mid-single digit contraction earlier on its NIM for FY19. However, the impact of the OPR cut will be temporary, affecting its margins in 2QFY19 before gradually improving from 4QFY19 due to downward repricing of deposits. Most of the deposits are expected to be repriced after 6 months. Post-OPR cut in May 2019, the group hinted that deposit competition has eased slightly. On the outlook of the OPR, management does not foresee another rate cut in 2H19.

• In terms of NOII, the fee and commission income from unit trust business is likely to be flat QoQ in 2QFY19. Meanwhile, the decline in MGS yield is expected to provide benefits with opportunities of recognizing marked-tomarket and realized gains on its securities portfolio.

• The group is keeping to its credit cost guidance to be less than 15bps for FY19. It is now targeting a credit cost of below 10bps for the year. For our FY19 estimate, we are now assuming a credit cost of 5bps (previously: 8bps) due to net write-back in provisions of RM3.2mil in 1QFY19.

• With the ongoing challenges on revenue, negative JAW is still expected to persist in its upcoming 2QFY19 results with operating expenses outpacing total income growth. With that, the group CI ratio for FY19 is expected to be slightly higher at 34.0% than FY18’s 33.0%.

• The group will soon be launching a new mobile app with QR and face recognition capabilities as well as revamping its online banking.

• Over the next 3 years, the group has allocated a capex of RM600mil to enhance its IT hardware, software and knowledge of its employees. This includes RM180mil on fintech initiatives and projects. We believe that there is still room to improve its cost efficiency hence lowering its CI ratio after the completion of the investments moving forward.

• Recall that in FY18, dividend payout ratio was 47.9%. In FY19, a similar payout is expected for dividends.

• The group’s strength continues to lie in its robust asset quality with a strong credit culture. Meanwhile, its CET1 ratio of 12.9% appears to be more conservative with significant provisions set aside resulting in a higher LLC (including regulatory reserves) ratio of 244.1% as at end-March 2019 than its peers.

Source: AmInvest Research - 8 Jul 2019