Defensive Qualities In Times Of Uncertainty

Pbank should be a prime beneficiary of the new government’s policies in raising disposable income and private sector growth in the longer term given its consumerand SME-centric loans base. Current valuations have also declined to -1SD below its long-term mean PE while greater earnings resilience amid the current uncertainty should warrant a larger valuation premium gap to peers. Upgrade to BUY with a higher target price of RM25.20 (2.45x 2018F P/B, 14.7% ROE) post earnings upgrade.

WHATS NEW

• Earnings resilience in light of government policy changes. Public Bank’s (Pbank) share price has declined 7.1% since we downgraded the stock to a HOLD in late-Mar 18 on valuation grounds and 12.5% from its recent peak. Although foreign shareholding remained high at 39.0% as at end-May 18 vs the all-time high of 39.4%, we believe that stability in share price will eventually be anchored by the group’s more resilient earnings outlook in light of the new Pakatan Harapan (PH) government’s fiscal spending cutback. Pbank’s construction and government related loans constitute 2% and 0.4% of its total loans base respectively vs sector average of 4% and 2% respectively. This would also place the group in a better position to contain any potential lumpy NPL risk emanating from the review/cancellation of various infrastructure projects
• In the right segments to benefit from stronger purchasing power over the longer term. The group’s loans composition, which is heavily skewed to the consumer and SME segments (86% of domestic loans books), should benefit from the PH government’s mandate to raise the disposable income of the masses and have the private sector as a key economic growth engine. This may help to fuel stronger consumer and SME loans growth. We believe that auto loans (15.6% of Pbank’s loans base vs industry’s 10.0%) and SME loans within the wholesale and retail trade segments (8.4% of Pbank’s loans base vs industry’s 7.2%) could experience a more immediate uplift in growth on the back of the expected improvement in consumer purchasing power and confidence emanating from PH’s mandate to raise disposable income.
• Share price has displayed resilience in times of uncertainties. Pbank’s foreign shareholding rose despite the oil price and currency challenges that Malaysia faced in 2015- 16 as its defensive qualities were well reflected in the group’s 12.5%/2.5% earnings growth vs sector’s earnings contraction of -2.5%/-0.8%. As such, there was an inverse relationship observed between its share price performance and slight decline in ROE as investors had flocked to PBank in times of uncertainties.
• Moderate uptick in loans growth expectations. Assuming that loans growth in the auto and SME (wholesale and retail trade) segments were to increase from a flattish-to-low single digit growth to a low-to-mid single-digit percentage growth in 2H18-2019, this could raise our 2018-20 loans growth estimates for the group to 5.5%, 6.9% and 7.0% respectively vs our previous estimates of 5.0%, 6.0% and 6.0% respectively. The 3-months “tax holiday” period in 3Q18 before the implementation of the SST would likely lead to a spurt in auto loans growth in 3Q18. As the SST has a smaller scope of coverage vs the GST, we opine that even with a switch back to the SST tax regime, it should theoretically lead to a net positive impact on overall consumption and hence consumer loans growth.
• Commendable pre-provision operating profit growth. We noted that in its recent 1Q18 results, Pbank’s pre-provision operating profit (PPOP) was the strongest and one of the most balanced compared with its other large-cap banking peers. PPOP expanded 9.4% yoy in 1Q18 underpinned by: a) 12.1% yoy growth in fee income driven largely by a 15.2% yoy increase in unit trust management fees, b) 6bp qoq expansion in NIM arising from the recent rate hike, and c) tight cost discipline resulting in a marginal 1.4% yoy uptick in operating expense. Despite the expected re-pricing of fixed deposits in 2Q18, management continues to guide for a 5bp NIM expansion in 2018.
• Credit cost to remain well contained. Net credit cost is beginning to normalise gradually upwards to 9bp from 2017’s 7bp partly due to the effects of MFRS9 and lower recoveries. However, with asset quality remaining benign and its LLC inclusive of regulatory reserves at a very robust 261% (industry average: 130%), we expect full-year 2018 net credit cost to remain well contained at 10bp vs industry’s 37bp.

EARNINGS REVISION/RISK

• We raise our 2018/19/20 earnings by 2%/2.7%/3.2% post upwards adjustments in loans growth and slower mid-single-digit opex growth vs high single-digit as guided by management.

VALUATION/RECOMMENDATION

• Upgrade to BUY with higher target price of RM25.20 (2.45x 2018F P/B, ROE: 14.7%) post earnings revision. Pbank’s share price has declined by 7.1% since we downgraded the stock to a HOLD in late-March on valuation ground and 12.5% from its recent peak. Whilst there could still be a slight downside risk to share price performance given its relatively high foreign shareholding of 39.0% as at end-May 18 vs 20-year mean of 32%, we note that current valuation of 14.9x PE is close to -1SD below its 5-year historical mean PE of 14.4x and the group should be a prime beneficiary of the new government’s policies in raising disposable income and private sector growth over the longer term.