- We maintain our BUY rating on Public Bank Bhd (PBB), with an unchanged fair value of RM19.80/share. This is based on FY14F ROE of 21.4% and a fair P/BV of 3.1x.

- PBB registered QoQ increases in auto and residential mortgage impaired loans for three consecutive quarters. Auto impaired loans rose from RM271.9mil in 1QFY13 to RM318.2mil in 2QFY13 and RM338.9mil in 3QFY13. Consequently, auto gross impaired loans ratio had also increased from 0.6% in 1QFY13 to 0.7%in 2QFY13 and 0.8% in 3QFY13.

- At the same time, residential gross impaired loans registered upticks from RM413.8mil in 1QFY13 to RM470.7mil in 2QFY13 and RM528.4mil in 3QFY13. The residential gross impaired loans ratio had correspondingly increased from 0.7% in 1QFY13 and 0.7%in 2QFY13 to 0.8% in 3QFY13.

- The increases for the auto and residential mortgage segments were due mainly to a more stringent in-house classification of impaired loans, whereby borrowers may now be considered as impaired although the customers are less than three months in arrears of repayment.

- We understand that the more stringent classification came about mainly due to PBB’s more in-house prudent stance following its study of behavioural changes, particularly in the second-hand auto segments. We understand that this is in line with PBB’s yearly improvement of its classification standards.

- Without the more stringent in-house criteria, we believe that the residential mortgage segment would be relatively stable. Given PBB’s track record, we remain comfortable with PBB’s asset quality.

- In addition, PBB is the only bank which has disclosed the collateral values for its loans. Collateral values are way higher at RM307bil compared to overall group gross loan base of RM198bil for FY12.

- Even for the impaired loans segment, PBB disclosed that the overall the total collateral value was RM1.71bil, representing about 1.2x coverage of its gross impaired loans of RM1.37bil as at end-FY12. This is also the case for its past due but not impaired loans segment, whereby the collateral value was disclosed at RM29.4bil, which is 1.4x higher than the past due amount of RM21.8bil. Therefore, we are maintaining our credit costs assumptions at 16bps for FY13F, 19bps for FY14F and 17bps for FY15F.

Source: AmeSecurities