As expected, Public Bank’s 3Q19 earnings were down 2% YoY. Negative Jaws and upward normalizing effective tax rate, dragged down overall profitability. Also, loans growth did not gather momentum. However, sequential NIM was stable and asset quality improved. Overall, our forecasts were unchanged. That said, we still find its risk-reward profile has not become compellingly attractive given dull yield offering and its high foreign shareholding (>30%), makes it more susceptible to sell-offs. Retain HOLD but with a lower GGM-TP of RM21.10 (from RM22.30), based on 1.76x 2020 P/B.

No surprises. Public Bank 3Q19’s profit came in at RM1.3b (+2% QoQ, -2% YoY), lifting 9M19 earnings to RM4.1b (-2% YoY). This was in line with expectations, making up 74% of both our and consensus full-year estimates.

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

QoQ. Lower net impaired loan allowances (-25%; thanks to better recoveries), helped Public Bank’s bottom-line to improve 2%. However, pre-provision profit was relatively flat given sluggish non-interest income (NOII, -11%) showing due to lower card related fee, investment and forex gains. Net interest margin (NIM) was unchanged at 2.12%.

YoY. Negative Jaws from slower total revenue growth (+2%) vs opex (+7%) coupled with upward normalizing effective tax rate (+1ppt), dragged down overall profitability (- 2%). The higher opex was due to rising personnel costs (+9%).

YTD. Similar to YoY performance, Public Bank’s earnings fell 2% given lacklustre top line growth (+2%) and higher effective tax rate (+2ppt). However, it was mitigated by lower provision for bad loans (-18%).

Other key trends. Loans growth did not gain momentum at 4.1% YoY (2Q19: +4.2%) but deposits tapered to 3.7% YoY (2Q19: +5.8%). In turn, loan-to-deposits ratio (LDR) nudged up 1ppt sequentially to c.94%. As for asset quality, gross impaired loans (GIL) ratio improved 1bp QoQ to 52bp.

Outlook. Although NIM is expected to recover over the next 3 months from downward deposit repricing (lagged impact of May-19’s OPR cut), we believe contraction is likely to resurface after that, given its diminishing flexibility to optimize LDR (already at high levels of c.94%) and growing price-based competition for loans. Also, we do not see lending growth to pick up pace materially, observing a slower domestic macro climate and ongoing political unrest in Hong Kong (makes up c.5% of total lending). Hence, total income is poised to be downbeat coupled with cost pressure in the offing (from wage inflation and IT outlay), should lead to higher cost-to-income ratio (3Q19: +2ppt YoY to 35%). That said, we see asset quality to remain steady at current levels.

Forecast. Unchanged as 3Q19 results were within estimates. Also, management kept its overall 2019 guidance.

Retain HOLD but cut our GGM-TP to RM21.10 (from RM22.30), in view of recent sector de-rating and its high valuation risk. This is based on 1.76x 2020 P/B (from 1.86x) with assumptions of 12.4% ROE, 8.4% COE (from 8.1%), and 3.0% LTG; it is above the sector’s P/B of 1.03x but below its 5-year mean of 2.08x. The premium /discount is justified by its ROE output, which is 3ppt/4ppt over/beneath industry/its 5- year average. Overall, we believe Public Bank’s risk-reward profile has not become compellingly attractive, given its dull dividend yield offering of 4% (peers: 5%) and high foreign shareholding level of c.34% (vs Maybank: c.19% & CIMB: c.30%), makes it susceptible to sell-offs.

Source: Hong Leong Investment Bank Research - 8 Nov 2019