Investment Highlights

• We maintain BUY call on Public Bank (PBB) with an unchanged fair value of RM4.70/share. This is supported by a ROE of 13.3% leading to FY23F P/BV of 1.7x. No change to our neutral 3-star ESG rating.

• We make no changes to our earnings estimates.

• Intensity of deposit competition has eased from 4Q22 which saw most banks offering FD promotion rates of more than 4% through campaigns. Presently, competition for deposits still persists. Nevertheless, it has shifted to shorter tenures of 6- 9 months in comparison to 12 months or more earlier when the market was expecting OPR hikes.

• Recall that the group’s 1Q23 NIM was compressed by 32bps QoQ to 2.26%. This was attributed to the tapering positive impacts of earlier OPR hikes which cumulated to 100bps in FY22 on asset yield and the rise in funding cost. In 2Q23, we expect PBB’s NIM to improve with a lower compression than 1Q23, contributed by the increase in OPR of 25bps to 3% on May 2023 which is anticipated to increase its asset yield.

• With FD campaign rates of banks now seen lower than the 4Q22, we expect NIM compression of PBB to narrow down in the subsequent quarters of FY23 from 1Q23. For now, we maintain our NIM assumption of 10bps compression for FY23F. Our economics team expects no further interest rate hikes for the remainder of 2023 with OPR maintained at 3%.

• In the recent FOMC meeting in June 2023, the Fed Reserve has kept the US benchmark interest unchanged at 5-5.25%. However, the Fed rate is still expected to be further hiked by 2 more times (25bps each) to 5.5-5.75% in 2H23 given the robust job market and stubborn inflation. Hence, with the market still volatile, challenges are likely to remain on unit trust and stockbroking income in the near term. Nevertheless, we expect these to be partly mitigated by strong FX income and improvement in investment income with a more stable 10-year MGS yield in 2H23 than 2H22.

• In 1Q23, the group’s loans (domestic and overseas) registered a growth of 5.2% YoY. Domestic loans grew 5.1% YoY against the industry’s 5%. In line with the expectation of slower economic growth in 2H23, the group’s overall loan growth is expected to moderate, thus ending FY23 with a growth of 4%-5% vs. 5.3% in FY22.

• Slight uptick in the group’s GIL ratio from 0.42% in FY22 continues to be expected after the exit of loans from financial assistance. Active outstanding loans under repayment assistance (RA) as a percentage of total domestic loans were slightly above 2%. Loan repayments for 90% of expired RA loans have been serviced promptly.

• Delinquency rates are anticipated to remain stable with loans of more than 1 month in arrears (MIA) to total financing staying below the pre-pandemic level of 4%. In 1Q23, the percentage of loans exceeding 1 month in arrears stood at 2.1%.

• Management overlays remain intact at RM1.8bil. The group remains prudent on provisions, and we do not expect any substantial write-backs on management overlays in FY23 in view of macroeconomic variability.

• We expect lower provisions in FY23F supported by stable loan delinquency rates as well as potentially some releases of management overlays in 2H23. Our credit cost assumption of 8bps is maintained for FY23F.

• In the upcoming 2Q23 results to be announced in Aug 23, earnings are expected to be decent, supported by higher net interest income from the improvement in NIM, stable provisions with no negative surprises to overhead expenses (OPEX). On OPEX, we do not foresee any lumpy increase in IT expenses ahead. This is in view that there will only be enhancements without any major revamps to the group’s core banking systems.

• The stock is trading at a compelling 1.4x FY23F P/BV, below the 5-year historical average of 1.8x with a decent dividend yield of 4.5%. We continue to see room for further upside for the share price.

Source: AmInvest Research - 11 Jul 2023