Results

• 1HFY16 net profit of RM2.49bn (+5%) came in within expectations, accounting for 48.8-49.8% of our and consensus full-year forecasts.

Deviations

• Broadly in line.

Dividend

• Announced 1st interim DPS of 26 sen, translating to payout ratio of 40.4%.

Highlights

• 1HFY16 net profit growth of 5% was driven by 9.5% yoy loan growth, a 10bps improvement in NIM, marginally higher NOII, but partly offset by higher overhead expenses.

• Against its FY16 KPIs, annualized ROE and total capital ratio of 16.2% and 15.4% surpassed group’s targets of >15% and >13% respectively, while annualized domestic loan and deposit growth of 8.3% and 7.4%, as well as CIR of 32.3% were in line with its KPIs.

• Loan growth of 9.5% yoy was driven mainly by residential properties and SME loans (which in turn was reflected in purchase of non-residential properties and working capital), which grew by 11.6% and 13.7% respectively.

• LDR increased to 90.5% (from 89.9% in 1Q16), as loan growth (+2.3% qoq) surpassed deposit growth of 1.6% (qoq).

• Asset quality remains robust, with both gross and net IL ratios remained stable at 0.5% and 0.4% respectively, while LLC declined marginally to 116.3% (from 120.1% in 1Q16).

• Impact of OPR adjustments on NIM… Public Bank’s recent move to reduce its base rate and base lending rate (by 23bps) will have an impact on its NIM, hence its FY16 bottomline by 1.5%. Nevertheless, management highlighted that such move has already been accounted for in its earlier NIM guidance.

Risks

• Unexpected jump in impaired loans, lower than expected loan growth and higher than expected erosion in NIM

Forecasts

• Maintained.

Rating

HOLD

• Positives:

• Above industry asset quality and stronger capital position post rights issue;

• Excellent track record in delivering guidance and consistency in growth.

• Negatives:

• Uncertainty on quantum of counter cyclical buffer;

• ROE dilution from rights issue.

Valuation

• Maintain Gordon Growth Derived TP of RM18.50 (based on ROE and WACC of 15.8% and 8.5%). While we like Public Bank for strong brand name and market position, as well as its sustained quality loan growth, we believe further upside is capped by its rich valuation (FY16 P/E of 14.9x, vs. industry average FY16 P/E of 10.9x).

Source: Hong Leong Investment Bank Research - 29 Jul 2016