Unsurprisingly, Public Bank’s 4Q19 earnings were flat % YoY; the faster rise in opex and bad loans provision offset total income growth. Besides, loans growth did not gather momentum. However, sequential NIM and asset quality improved. Regardless, we cut FY20-21 profit by 2% to factor in higher NIM slippage. That said, we still find its risk-reward profile has not become compellingly attractive given its below average dividend yield offering and high foreign shareholding level. Retain HOLD but with a lower GGM-TP of RM19.00 (from RM20.20), based on 1.58x FY20 P/B.

No surprises. Public Bank’s 4Q19’s profit came in at RM1.4b (+3% QoQ, flat YoY), lifting FY19 earnings to RM5.5b (-1% YoY). This was within expectations, making up 100% of both our and consensus full-year estimates.

Dividend. A final DPS of 40sen (+8% YoY) was declared. Ex-date: 11th March.

QoQ. Higher total revenue (+3%) coupled with lower net impaired loan allowances (- 12%), helped Public Bank’s profit to improve 3%. At the top, net interest margin (NIM) widened 5bp while investment and forex gains jumped 65% and 91% respectively.

YoY. Despite chalking a robust total income growth (+5%), this was erased by the quicker rise in opex (+11%) and bad loans provision (+26%). In turn, earnings came in flattish. The higher opex was due to rising personnel costs (+12%).

YTD. Negative Jaws from slower total revenue growth (+2%) vs opex (+7%) along with upward normalizing effective tax rate (+2ppt), dragged down overall profitability (- 1%). However, it was mitigated by lower provision for impaired loans (-9%).

Other key trends. Loans growth did not gain momentum at 4.1% YoY (3Q19: +4.1%) but deposits accelerated to 4.2% YoY (3Q19: +3.7%). In turn, loan-to-deposits ratio (LDR) nudged down 1ppt sequentially to c.94%. As for asset quality, gross impaired loans (GIL) ratio improved 3bp QoQ to 49bp.

Outlook. NIM slippage is seen to return in 1Q20 given the recent OPR cut. However, gradual recovery should ensue in the following 3-6 months from downward deposit repricing (lagged impact) - this is expected to be short-lived 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. Besides, total income is poised to remain downbeat and the persisting cost pressure (from wage inflation and IT outlay), should continue to keep cost-to-income ratio elevated (4Q19: +2ppt YoY to 35%). That said, we see asset quality to remain steady at current levels.

Forecast. Despite 4Q19 results coming in line, we cut FY20-21 profit by 2% to factor in higher NIM slippage. Also, we introduce FY22 estimates.

Retain HOLD but with a lower GGM-TP of RM19.00 (from RM20.20), following our earnings cut and based on 1.58x FY20 P/B (from 1.68x) with assumptions of 12.2% ROE (from 12.4%), 8.8% COE (from 8.6%), and 3.0% LTG. This is above the sector’s P/B of 0.92x but below its 5-year mean of 2.04x. The premium/discount is justified by its ROE output, which is 2ppt/3ppt over/beneath industry/its 5-year average. Overall, we believe the stock’s risk-reward profile has not turn compellingly attractive, given its lower dividend yield offering of 4% (vs peers: 5%) and high foreign shareholding level of c.33% (vs Maybank: c.19% & CIMB: c.30%) - making it susceptible to sell-offs.

Source: Hong Leong Investment Bank Research - 27 Feb 2020