Investment Highlights

• We are maintaining our BUY call on Public Bank (PBB) with a lower fair value of RM23.60/share from RM25.00/share. Our valuation is based on an FY20 P/BV of 2.0x supported by an ROE of 13.0%. Our forward PB is lower than the historical mean of 2.3x (5-year average). We trim our FY19/20/21 earnings by 0.6%/0.9%0.4% to RM5.53bil/RM5.79bil/RM6.13bil after factoring in another OPR reduction of 25bps in 2H19. We continue to see value emerging after the recent steep selldown on the stock and believe that concerns on the group’s Hong Kong operations due to protests as well as on its asset quality are unwarranted.

• The group recorded a net profit of RM1.3bil in 2Q19 which was lower by 5.5% QoQ largely due to higher operating expenses and provisions for loan losses compared with a net write-back in allowances for impairments in 1Q19.

• 6M19 core earnings came in at RM2.74bil, a modest decline of 2.1% YoY underpinned by higher overhead expenses and lower net interest income (NII) due to the OPR cut of 25bps in May 2019. Cumulative earnings were within expectations, making up 49.3% of our and 48.2% of consensus estimates. The group delivered an ROE of 13.2% for 6M19, in line with our estimate.

• Year to date, the group’s loan (domestic and overseas) grew at an annualized rate of 4.0% or 4.2% YoY. Domestic loans grew by an annualized rate of 4.3%, outpacing the industry’s 2.7% annualized growth.

• The group’s deposits accelerated to 5.9% annualized or 5.8% YoY resulting in a lower net LD ratio of 92.2%. CASA ratio remained stable at 25.3%.

• YTD, the group’s NIM fell 6bps to 2.16% due by the recent OPR cut and was in line with management’s guidance of up to high-single digit compression for FY19.

• NOII rose by 8.1% YoY in 6M19 with higher banking fee and investment income offsetting a drop in unit trust and stockbroking income.

• The group continued to record a low GIL ratio of 0.5%, well below the domestic industry's 1.6%. With regulatory reserves of RM1.89bil, loan loss cover remained high at 226.5%. Credit cost in 6M19 remained low at 4bps vs. 6M18’s 6bps.

• The group declared a first interim dividend of 33 sen/share (payout: 46.7%) for 6M19 which was slightly higher than the 32 sen/share (payout: 44.3%) in 6M18.

Source: AmInvest Research - 15 Aug 2019