Public Bank’s 1H18 net profit of RM2.8bn (8.6% YoY) came in within expectations, accounting for 48.1% of our and consensus full-year forecasts. Declared 1st interim DPS of 32 sen (ex-date: 7 Sep 18). The commendable results achieved in 1H18 was driven mainly by stable operating income of RM5.4bn (+3.8%) and lower loan loss allowance of RM86m (-8.2% YoY). No change to our earnings forecasts, and GGM-derived TP of RM26.00 (9.4% COE and 8.3% WACC). Maintain BUY rating.

Results in line. 2Q18 net profit of RM1.39bn (QoQ: -0.7%; YoY: +4.9%) took 1H18 net profit to RM2.8bn (+8.6%). The results came in within expectations, accounting for 48.1% of our and consensus full-year forecast.

Dividend. Declared 1st interim DPS of 32sen (higher than last year’s 1st interim DPS of 27 sen), equivalent to 44% payout. For FY18, we are projecting a total DPS of 60 sen, translating to a projected yield 2.3%.

QoQ. 2Q18 net profit moderated by 0.7% to RM 1.39bn, as lower loan loss allowance (-74.4%) was more than offset by a 1% decline in NII (arising from a 6bps decline in NIM) and a 10.3% decline in NOII (on the back of muted capital market activities, but partly mitigated by improved contribution from asset management segment), which have collectively resulted in operating income declining by 3% to RM2.68bn.

YoY. 2Q18 net profit was stronger by 4.8% mainly on the back of lower loan-loss provision (-34% YoY, owing to decrease in CA by -68% YoY) and marginal growth in operating income (+1%, as higher NII more than mitigated weaker NOII).

YTD. 1H18 net profit advanced by 8.6% to RM2.8bn, mainly driven by stable operating income of RM5.4bn (+3.8% YoY) and declining loan loss allowance of RM86m (-8.2% YoY). Overhead increased marginally by 1.6% due mainly to marketing expenses.

Loan growth recovered. Public Bank loan growth advanced by 4.1% YoY, supported by mainly by residential segment, which grew by 9.2%, but partly offset by a 2.1% decline in hire purchase segment. Public Bank guided the demand for residential properties will remain strong in 2H18 while hire purchase would be revived in 3Q18. Management is maintaining it’s loan growth target of 5% for 2018.

Deposits stable. Deposit grew at a faster pace of 4% YoY (vs. 3.1%% in 1Q18), led by fixed deposits and CASA, which grew by 4.4% and 3.8% respectively. Nevertheless, NIM stabilized at 2.28% on 1H18 as Public Bank managed to reprice its variable loan to mitigate the higher funding cost.

Asset quality stable. GIL ratio remained low at 0.5% despite having witnessed moderation in several segments namely commercial properties and working capital which absolute NPL increased by 33% YoY and 16% YoY. Management is taking proactive measures to the impaired accounts in these segments, such as stepping up efforts in recoveries.

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

Maintain BUY, TP: RM26.00. We believe Public Bank is the biggest beneficiary of improving consumer sentiment and tax holiday period given its loan growth is heavily skewed towards retail loans. We maintain our BUY rating on Public Bank with unchanged TP of RM26.00 based on Gordon Growth (i) 9.4% COE; and (ii) 8.3% WACC.

Source: Hong Leong Investment Bank Research - 16 Aug 2018