- We maintain our HOLD rating on Public Bank Bhd (PBB), with an unchanged fair value of RM19.80/share. This is based on unchanged FY14F ROE of 21.2% and a fair P/BV of 3.0x.

- Following a recent circular issued by regulators in early February, we understand that banks may need to comply with a new provisioning ratio.

- All banks are now required to maintain, in aggregate, collective impairment provisions and regulatory reserves of no less than 1.2% of total outstanding loans, net of individual impairment provisions. To recap, there was no minimum requirement previously as banks were allowed to set the collective assessment rate since FY10.

- We believe there are two options for banks under the new ruling:- (1) Increase collective assessment rate to 1.2%; or (2) Increase regulatory reserve by transfer from retained earnings. The regulatory reserve would still be within the shareholders’ funds. However, regulatory reserve is considered as Tier 2 capital. Currently PBB does not maintain regulatory reserve.

- We expect PBB to adopt the second option, which is to transfer the additional amount required to meet the new minimum rate of 1.2%. With PBB’s CA rate now at 0.7%, we estimate that PBB may need to transfer a minimum of RM1.06bil from its retained earnings to the new regulatory reserves account. In this case, PBB’s proforma CET1 ratio at end-December 2013 is estimated to be lowered marginally to 8.2% from 8.8%.

- The good news is that our CET1 ratios forecast still looked comfortable, at 8.79% (from 9.38%) for FY14F, 9.01% (from 9.38%) for FY15F, and 9.32% (from 9.79%) for FY16F.

- Given the comfortable CET1 ratios, PBB is very likely to maintain its recently articulated dividend payout ratio target of close to FY13’s 44.8%. We also expect the absolute quantum of dividend to continue to rise, in line with profitability of the company.

- Book value and ROEs are also unchanged. There is also no change to net earnings forecasts. On balance, the new minimum rate requirement is not onerous, given the option for banks to transfer from retained earnings without impacting net earnings. Thus, we expect PBB’s share price to hold up well given its highly resilient earnings as the new requirement increases PBB’s provisioning buffer significantly. 

Source: AmeSecurities