We are positive that Public Bank will continue to deliver stable earnings performance with ROE set at 14%-15% banking on earnings growth of 4%-5%. We expect loan growth to post higher than management guidance of 5% driven by residential and SME segments. NIM is expected to expand at a slow pace chiefly from higher loan growth and better funding mix. Asset quality continues to outpace its peers thanks to its swift collection effort. Public Mutual is consistently growing its assets under management in the stable stock market environments. We reiterated our HOLD rating on Public Bank with high TP of RM23.70. TP is derived from (i) COE of 9.5% and (ii) WACC of 8.4%.

Sustained position. We believe Public Bank will remain an overachiever among its peers and set the tone for the overall banking sector’s performance in the coming quarterly results announcement.

ROE of 14-15% achievable. While the implementation of MFRS 9 (effective 1 Jan 2018, which will result in higher credit cost, and hence provisions), we are still projecting Public Bank to deliver earnings growth of 4% and achieve ROE of 14.6% (in line with management’s guidance of 14-15%) in FY18, underpinned by higher loan growth of 6% (vs. 4.4% in FY17), slight expansion in NIM (2.29 bps vs. 2.27 bps in FY17) and higher NOII.

Higher loan growth in FY18. With the economy headed for better times ahead, Public Bank is targeting to achieve higher loan growth of 5% in FY18 (vs. 3.6% achieved in FY17), to be led by residential mortgage and SME lending businesses while its hire purchase (HP) business is expected to see low single-digit growth due to deliberate strategy and weak auto sales in the market. In our forecast, we are projecting a loan growth of 6% (a tad higher than management’s target of 5%), given Public Bank’s track record in consistently beating the industry’s loan growth.

NIM to expand in FY18. Management remains conservative on the NIM expansion. Baring another round of deposit competition, we expect NIM to stay stable (albeit increase in slow pace) driven by better funding mix and recent OPR hike in Jan-18. We are factoring higher NIM by +2bps to 2.29% as we assume higher loan growth (thanks to concentration in the residential segment) and higher deposit growth target.

Asset quality holding up well. Despite its NPL rising in FY17, it remains very low among the peers, reflecting its efficient collection process and quality of customers which less affected with the economic slowdown. For SME, NPL ratio remains lows as bulk of the customers are from working capital segment tagged their properties to their loan.

Forecast. We revise our FY18-19 net profit forecasts upwards by 2% and 2.4% respectively, to account for higher NIM assumptions (in line with management’s guidance).

Maintain HOLD, TP: RM23.70. Post adjustments to earnings forecasts and WACC (as we updated the parameters for WACC) we raise our Gordon Growth-derived TP by 10% to RM23.70. Our new TP is arrived based on: (i) 14.6% ROE; and (ii) 8.4% WACC. While we are positive on Public Bank’s ability in delivering sustainable earnings growth, we believe upside is capped by its rich valuations.

Source: Hong Leong Investment Bank Research - 23 Apr 2018