Public Bank’s 1Q19 flattish net profit of 0.3% QoQ, met expectations. Negative Jaws crimped overall profitability and we find that earnings would have dipped if not for the write backs on allowance for impaired loans. Also, loans growth did not pick up momentum. That said, asset quality and NIM were stable. Overall, our forecasts were unchanged. For now, the risk-reward profile of the stock has not become compellingly attractive, in our view. Retain HOLD with GGM-TP of RM24.40, based on 2.15x 2019 P/B.

In line. Public Bank posted flattish 1Q19 earnings of RM1.4b (+0.3% QoQ and YoY). This came in within expectations, making up 25% of both our and consensus full-year estimates.

Dividend. None declared as Public Bank only divvy in 2Q and 4Q.

QoQ. If not for write backs on allowance for bad loans, Public Bank’s bottom-line would have declined. Pre-provision profit fell 1% given negative Jaws as weak total income (+1%) thwarts earnings acceleration; this was no thanks to the short Jan-Mar quarter. Besides, opex jumped 4% due to higher personnel (+5%), depreciation (+40%), and marketing costs (+9%). On a positive note, net interest margin (NIM) held up firm at 2.19% (+1bp).

YoY. Again, negative Jaws dragged down overall profitability, where total revenue fell 1% while opex rose 3%; we note that NIM compressed 14bp and fee-related income dropped 8%. In turn, pre-provision earnings were down 2%. Similar to QoQ showing, write backs on allowance for impaired loans, helped to soften the slew of negative impact.

Other key trends. Loans growth did not build up momentum at 4.4% YoY (4Q18: +4.2%) and was escorted by slower deposits expansion of 5.2% YoY (4Q18: +6.2%). Sequentially, loan-to-deposits ratio (LDR) remained high and relatively unchanged at c.93%. Asset quality continued to be strong with gross impaired loans (GIL) ratio hovering within the 0.48-0.52% band seen over the past 8 quarters (-1bp QoQ to 0.50%).

Outlook. Management’s low-key 2019 guidance is slowly coming to fruition. Over the short-term, we still do not see a major recovery in NIM given the diminishing flexibility to optimize LDR (already at high levels of 93%) and unlike peers, Public Bank has not raised its base rate and BLR to combat rising cost of funds (sector-wide rivalry for retail deposits). As for loans growth, we do not expect a pick-up in pace, considering a challenging macro climate. Thus, total income is poised to be downbeat and with cost pressure in the offing (from wage inflation and IT spending), should lead to negative Jaws and higher cost-to-income ratio (1Q19: +1ppt QoQ to 34%). That said, we see steady asset quality to persist.

Forecast. Unchanged as 1Q19 results were within estimates. Also, management kept its overall 2019 guidance.

Retain HOLD and GGM-TP of RM24.40, based on 2.15x 2019 P/B with assumptions of 13.4% ROE, 7.8% COE, and 3.0% LTG. This is in line with its 5-year mean of 2.15x but above the sector’s 1.16x. The premium can be justified by its strong asset quality and ROE generation track record. Despite the 8% YTD skid in share price, risk-reward profile has not become compellingly attractive, plagued by (i) modest earnings growth outlook, (ii) unappealing yield of 3% (peers: 4%), and (iii) high foreign shareholding level at c.37% (vs Maybank: 19.5% and CIMB: 25.6%).

Source: Hong Leong Investment Bank Research - 30 Apr 2019