- We maintain our HOLD rating on Public Bank Bhd (PBB) with a marginally higher fair value of RM19.20/share (from RM19.00/share previously), as we roll forward our base year to FY16F from FY15F. Our fair value is based on an ROE of 15.8% for FY16F (previously 16.5% for FY15F), leading to a lower fair P/BV of 2.2x (from 2.3x previously).

- At our recent company visit, PBB hinted that there is resurgence in competitive pressure for deposits, following a short lull period of stability towards mid-2015.

- PBB is maintaining its lowered guidance of NIM compression of -12bps YoY FY15F, with about 7bps-8bps likely to be attributed to ongoing yield compression and the balance from deposit competition.

- As for asset quality, the company remains confident of its recent asset quality trend, as there are no signs of stress in any parts of its loan portfolio.

- In a slowdown scenario, PBB believes that its credit costs should not exceed 20bps.This is partly because its credit costs remained low in its latest 1HFY15 reported results, averaging only 11bps.

- All in, the company considers net interest margin to be a more challenging issue, rather than asset quality.

- The key new information from our latest company visit is the ongoing stable asset quality trend, which is positive. The other new information is the resurgence in competition for deposit. Given the latest increase in industry loan-to-deposit ratio (LDR), we expect ongoing concerns on NIM trend for the industry.

- With the latest indication, as well as evidence of higher industry loan-to-deposit ratio (LDR) from the recent banking industry statistics, we have now revised our projection to -12bps (from -8bps previously) in NIM for FY15F, but are maintaining our forecast of -4bps for FY16F. This leads to an earnings downgrade of 2.5% for FY15F and 2.6% for FY16F.

- We maintain our HOLD rating as there is less than 15% upside (our in-house threshold for a BUY rating) to our fair value.

Source: AmeSecurities Research - 15 Oct 2015