Investment Highlights

• We keep our HOLD call on Public Bank (PBB) as the declining ROEs from compression in interest margin and higher provisions will reduce its premium valuation compared to its peers. We tweak both our FY20 and 21 earnings by -1.1% as we increase our loan growth assumptions slightly while raising our credit cost estimates to 20bps from 18bps. Our fair value is unchanged at RM16.00/share, pegging the stock to an FY21 P/BV of 1.3x, supported by an ROE of 10.7%.

• The group reported a core 2Q20 net profit of RM1.38bil (+3.9% QoQ) after stripping out the modification (mod) losses of RM498.4mil from the loan moratorium. We expect significantly lower mod loss moving forward in view of the extension of moratorium for another 3 months (Oct–Dec 2020) is only for the unemployed.

• 6M20 core earnings declined 1.2% to RM2.7bil due to OPR cuts impacting net interest income, higher opex and provisions for loan losses. Cumulative earnings accounted for 57.2% and 60.1% of our and consensus estimate. We deemed it to be within expectation as we have already factored in another OPR cut of 25bps (which we expect to occur in Sept 2020) into our earnings estimates.

• The group’s loan growth (domestic and overseas) eased slightly to 3.4% YoY (1Q20: 3.9% YoY). Domestic loans grew 3.6% YoY (1Q20: 3.8% YoY), slightly behind industry’s 4.1% YoY growth.

• Moderate deposit growth was sustained at 3.1% YoY with CASA expanding by a faster pace of 9.6% YoY (1Q20: 3.2% YoY).

• Excluding modification loss, the group’s underlying NIM fell by 10bps QoQ to 2.12% in 2Q20 while for 6M20, interest margin fell 12bps YTD to 2.03%. This was due to a further reduction in OPR by 50bps in May 2020.

• The group’s NOII rose by 8.2% YoY to RM1.3bil in 6M20. This was supported by gains from the disposal of FVTOCI securities of RM238.7mil, higher unit trust and brokerage income.

• The group's credit cost increased to 13bps in 6M20 vs. 4bps in 6M19 due to pre-emptive provisions taken for the impact of Covid-19. Management has raised its guidance for credit cost to 20–25bps for FY20.

• No interim dividend has been proposed. The group will assess its dividend plans upon the finalisation of FY20’s full-year results.

Source: AmInvest Research - 1 Sept 2020