Public Bank’s 2Q19 net profit fell 6% QoQ and 5% YoY, coming in slightly below expectations. Negative Jaws and higher bad loans provisions, dragged down overall profitability. Also, NIM slipped, loans growth tapered, and asset quality weakened a little. Faced with a challenging outlook, we cut our FY19-21 profit forecasts by 3%. All in all, we still find that the risk-reward profile of the stock has not become compellingly attractive. Retain HOLD with a lower GGM-TP of RM22.30 (from RM23.20), based on 1.86x 2020 P/B.

Slightly below expectations. Public Bank 2Q19’s earnings declined to RM1.3b (-6% QoQ, -5% YoY), bringing 1H19 bottom-line to RM2.7b (-2% YoY). This slightly missed expectations, making up 48% of both our and consensus full-year estimates due to weak total income growth. Also, we see 2H19 to be softer on growing price-based competition for loans and negative impact from the recent OPR cut.

Dividend. A 1st interim DPS of 33sen (+3% YoY) was declared. Ex-date: 28th August.

QoQ. Tepid total income growth (+1%) and loan loss provision (vs net write backs in 1Q19) caused Public Bank’s net profit to shrink 6%. Besides, opex climbed 3% due to higher personnel (+5%) and marketing costs (+5%). Furthermore, net interest margin (NIM) shrank 7bp to 2.12%.

YoY. Again, negative Jaws from slower total revenue growth (+3%) vs opex (+7%), higher allowance for impaired loans (+4-fold), and upward normalizing effective tax rate (+2ppt), dragged down overall profitability (-5%).

YTD. Similar to the above trends, Public Bank’s earnings fell 2% due to lacklustre top line growth (+1%) and higher effective tax rate (+2ppt). However, it was mitigated by lower provision for bad loans (-28%) given some write backs in 1Q19.

Other key trends. Loans growth did not gain momentum at 4.2% YoY (1Q19: +4.4%) but deposits expanded faster at 5.8% YoY (1Q19: +5.2%). However, loan-to-deposits ratio (LDR) remained high and was relatively unchanged at c.93% sequentially. As for asset quality, gross impaired loans (GIL) ratio nudged up 3bp QoQ to 53bp (but still at low levels), no thanks to its residential and commercial property mortgage segments.

Outlook. We see NIM slippage to persist given diminishing flexibility to optimize LDR (already at high levels of c.93%), full 6 months impact from May-19’s OPR cut, and growing price-based competition for loans. Also, we do not expect lending growth to pick up pace materially, observing a slower domestic macro environment and ongoing political unrest in Hong Kong (makes up c.5% of total lending). Hence, 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 (2Q19: +1ppt QoQ to 35%). That said, we see asset quality to remain steady at current levels.

Forecast. We cut our FY19-21 profit forecasts by 3% to reflect softer NIM and loans growth assumptions.

Retain HOLD but lowered our GGM-TP to RM22.30 (from RM23.20), as we cut earnings and based on 1.86x 2020 P/B (from 1.92x) with assumptions of 12.4% ROE, 8.1% COE, and 3.0% LTG. This is above the sector’s P/B of 1.05x but below its 5- year mean of 2.11x. The premium/discount is justifiable by its ROE generation, which is 3ppt/4ppt over/beneath industry/5-year average. Overall, we still find that its risk reward profile has not become compellingly attractive given its: unappealing yield of 4% (peers: 5%) and high foreign shareholding level at c.35% (vs Maybank: 19.0% and CIMB: 29.4%).

Source: Hong Leong Investment Bank Research - 15 Aug 2019