Investment Highlights

• We keep our HOLD call on Public Bank (PBB) as we continue to see declining ROEs which will reduce the its premium valuation compared to its peers. Our FV is revised to RM15.50/share from RM15.95/share, pegging the stock to a lower FY20 P/BV of 1.3x, supported by an ROE of 11.1%. We tweak our FY20/21/22 earnings by -0.5%/2.3%/3.1% on lower loan growth forecast of 2%/2%/4% and fine-tune our NIM assumptions.

• The group reported a 1Q20 net profit of RM1.33bil, down 5.7% YoY due to lower net interest income from OPR cuts, higher overhead expenses and provisions.

• Earnings were within expectations, making up 26.7% of our and 25.5% of consensus estimates. The group delivered an ROE of 12.2% for 1Q20.

• The group’s loan growth (domestic and overseas) moderated to 3.9% YoY. Domestic loans grew 3.8% YoY, slightly behind industry’s 4.0% YoY growth.

• Deposit growth slipped to 3.5% YoY in tandem with loans. However, CASA expanded by a faster pace of 3.2% YoY, resulting in a higher CASA ratio of 25.4%.

• Group NIM fell by 12bps QoQ or 10bps YTD to 2.05% in 1Q20 due to OPR cuts of 25bps each on Jan and Mar 2020. In 2Q20, NIM is anticipated to be compressed again due to the 50bps reduction in OPR to 2.00% on 5 May 2020. Every 25bps cut in OPR will have an impact of 3– 4bps on the group’s NIM. With a YTD OPR cut of 100bps, management is now guiding for the group’s FY20 NIM to be compressed by 15bps compared to 5–10bps earlier.

• The group’s 1Q20 NOII grew by 5.7% YoY to RM618mil. The improvement was contributed by gains from the disposal of FVTOCI securities of RM106mil, and higher unit trust and brokerage income.

• It recorded a negative JAW of 6.0% YoY with opex outpacing income. CI ratio increased to 35.7% due to challenges on revenue growth.

• The group's credit cost increased to 7bps in 1Q20 vs. 5bps in 4Q19 due to pre-emptive provisions taken for the impact of Covid-19. For FY20, we are maintaining our credit cost estimate of 18bps, which is slightly higher than management guidance of up to 15bps.

Source: AmInvest Research - 27 May 2020