Public Bank results were within expectations, with 1Q18 net profit of RM1.4bn (- 5.4% QoQ, +12.6% YoY), making up 24.9% and 24.4% of our full year forecast and consensus. NOII surged strongly due to forex income and contribution from Public Mutual. Nevertheless, loan growth moderated to 3.4% YoY, derailed by ex-Malaysia loan growth, while NIM and deposits growth continue to hold up at 3.4% and 3%YoY respectively. We reiterate our HOLD rating on Public Bank with GGM TP of RM23.70, derived from (i) COE of 9.5% and (ii) WACC of 8.4%.

Results in line. Public Bank posted firmer 1QFY18 results with net profit of RM1.4bn (-5.4% QoQ, +12.6% YoY), in line with our and consensus expectations, accounting for 24.9% and 24.4% full year forecast, respectively. The results were underpinned by operating income (+6.6% YoY), but was offset marginally by higher loan loss provision (+2% YoY).

Dividend. No dividend was declared during the quarter.

QoQ. Net profit was weaker by -5.4%, hampered by: (i) lower NOII (-9.2%) and (ii) spiking loan-loss provision by 187%, but partly mitigated by higher NII.

YoY. Net profit was higher by 12.6% chiefly from higher topline but partly mitigated by the incremental in opex by 1.5%. Topline was driven by (i) NIM expansion (by 5bps to 2.33%) and (ii) higher forex income.

Slower loan. Public Bank’s loan growth eased marginally to 3.4% YoY (vs. 3.6% YoY end Dec-17) mainly on the back of further weakness in hire purchase (-2.4% YoY vs. - 3.0% YoY end Dec-17). Geographically, ex-Malaysia contributed to the slower loan growth whilst Malaysia loan growth was still healthy, which registered a growth of 4.8% YoY. Management’s loan growth target stands at 5% for 2018 vs. our assumption of 6%.

Deposits stable. Deposits picked up pace to 3.1% YoY (from 3% YoY in 4Q17), with CASA posting healthy a growth of 3% YoY.

NIM performed strongly. NIM rose strongly by 5bps QoQ to 2.33%, largely attributed to lower funding cost which saw a lower interest expense from customer deposits.

Asset quality. Overall GIL ratio remained healthy at 0.5% with surging loan loss coverage of 125.2%.

Forecast. We leave our forecast unchanged as the results were inline.

Maintain HOLD, TP: RM23.70. We maintain our TP on Public Bank based on Gordon Growth (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. Currently, Public Bank is trading at 2.4x P/B. in line with is 3-years average P/B of 2.5x, translating into limited upside potential for Public Bank.

Source: Hong Leong Investment Bank Research - 3 May 2018