Public Bank’s 4Q18 net profit ticked up 2% QoQ, meeting expectations. Growth was backed by lower loan loss provision but could have been if not for the poor NOII showing. However, asset quality remained stable and NIM ticked up a little. We saw loans growth chugging along but it was still slower vs industry’s pace. In our opinion, NIM slippage should return as LDR optimisation is increasingly difficult since it is already elevated vs 3-4 years ago. Forecasts are unchanged. Valuation wise, it is unattractive despite being Malaysia’s most well run bank. Retain HOLD with GGM-TP of RM26.50, based on 2.36x 2019 P/B.

Within estimates. Public Bank registered 4Q18 earnings of RM1.4b (+2% QoQ, -5% YoY). In turn, this brought 2018 net profit to RM5.6b (+2% YoY), which came in line with expectations, accounting for 98-99% of our and consensus full-year forecasts.

Dividend. A 2nd interim DPS of 37sen (+9% YoY) was declared, which helped to carry full-year DPS to 69sen (+13% YoY).

QoQ. Earnings nudged up 2% given lower loan loss provision (-30%). However, poor showing by non-interest income (NOII, -5%) capped overall bottom-line from growing quicker; this was due to weaker fee (-4%) and investment-related income (-86%). On the bright side, net interest margin (NIM) ticked up slightly by 2bp to 2.18%.

YoY. Subdued total income (-3%), higher overhead expenses (+9%), and the surged in allowance for impaired loans (+45%) were main reasons that led to the 5% decline in net profit. However, the lower effective tax rate (-3ppt to 20%) helped to cushion the negative impact.

YTD. The 2% earnings growth was supported by: (i) higher total revenue (+1%) as loans expanded 4.2%, lifting both net interest and Islamic banking income by 2-7%, (ii) lower allowance for bad loans of by 17%, and (iii) lesser taxes paid (-9%) due to certain income not subject to tax.

Other key trends. Loans growth held up well at 4.2% YoY while deposits followed suit but at a quicker momentum of 6.2% YoY. However, loan-to-deposit ratio (LDR) was somewhat unchanged at c.94% sequentially. Besides, asset quality was stable where it saw a slight 1bp QoQ downtick in gross impaired loans (GIL) ratio to 0.51%, which was within the 0.48-0.52% band seen over the past 8 quarters.

Outlook. We see NIM slippage from retail fixed deposits rivalry given the diminishing flexibility to optimise LDR since it is already towering at high levels of 94% (industry: 87%); this strategy was utilised in 2015-16 and it worked as NIM trend was stable but back then LDR was lower at 88-90%. Thus, we pencilled in 2019-20 NIM compression of 1-4bp. As for loans growth, we do not expect a pick-up in pace in 2019-20 where we are projecting an increase of only 4-5% vs 2018’s 4.2% and industry’s 5.6% given challenging operating climate. That said, we see steady asset quality to persist.

Forecast. Unchanged as 4Q18 results were within estimates.

Retain HOLD and GGM-TP of RM26.50, based on 2.36x 2019 P/B with assumptions of 13.8% ROE, 7.6% COE, and 3.0% LTG. This is above its 5-year mean of 2.17x and the sector’s 1.17x. The premium is fair given its strong asset quality track record and being the most profitable bank in Malaysia. While we acknowledge that the bank has a lot of strengths, valuation wise, it is not compelling. It is currently trading at its 5-year average P/B while on a P/E basis, it is at +2SD, amid a declining ROE trend from 21% in 2013 to present level of c.14%. Also, its dividend yield is unattractive below 3%.

Source: Hong Leong Investment Bank Research - 21 Feb 2019