Public Bank’s 1Q20 net profit fell 6% YoY due to negative Jaws and higher bad loan provision. Besides, NIM contracted sequentially and loans growth tapered. However, there was a slight improvement in asset quality. Overall, results were within estimates but with weaker management guidance, we cut FY20-22 profit by 1-6%. Hence, we still find its risk-reward profile has not become compellingly attractive; also, this is due to its below average dividend yield offering and high foreign shareholding level. Maintain HOLD but with a lower GGM-TP of RM13.70 (from RM14.00), based on 1.09x FY21 P/B.

Within expectations. Public Bank registered 1Q20 net profit of RM1.3b (-6% QoQ & YoY). This came in within estimates, making up 26% of both our and consensus full year forecasts.

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

QoQ. The 2% contraction in total income coupled with the 42% higher impaired loan allowances, caused Public Bank’s earnings to drop 6%. At the top, net interest margin (NIM) shrank 12bp due to the 50bp OPR cut in 1Q20 while non-interest income (NOII) was flat during the quarter.

YoY. Negative Jaws from slower total income growth (+2%) vs opex (+8%) along with the higher provision for bad loans of RM61m (vs a net writeback of RM3m in 1Q19), dragged down overall profitability (-6%); opex accelerated mainly due to the 10% rise in personnel cost.

Other key trends. Both loans and deposits growth momentum slowed to 3.9% (4Q19: +4.1%) and 3.5% YoY (4Q19: +4.2%) respectively. However, the sequential loan-to deposits ratio (LDR) was still elevated at c.94% (flat QoQ). As for asset quality, gross impaired loans (GIL) ratio continued to be strong and improved 3bp QoQ to 46bp.

Outlook. NIM pressure is seen to persist into following quarters given May-20’s 50bp OPR cut and possibly another 25bp reduction in 2H20. Also, with the confluence of events from Covid-19 crisis and imminent recession, loans growth is anticipated to taper even further. Besides, asset quality is poised to weaken but it should not spiral out of control (at least till end Sep-20); this is because Malaysian borrowers were granted 6-mth loans deferment while any restructuring & rescheduling (R&R) of loans affected by Covid-19 will not be tagged as impaired.

Forecast. Despite 1Q20 results were within expectations, we cut FY20-22 profit by 1- 6% to factor in higher NIM slippage and net credit cost assumptions.

Retain HOLD but with a lower GGM-TP of RM13.70 (from RM14.00), following our profit cut and roll valuations to FY21. The TP is based on 1.09x P/B (from 1.17x) with assumptions of 10.8% ROE (from 11.5%), 10.1% COE, and 3.0% LTG. This is above the sector’s P/B of 0.78x but below its 5-year average of 1.99x. The premium/discount is justified by its ROE generation, which is 3ppt/4ppt over/beneath industry/its 5-year mean. Overall, we believe the stock’s risk-reward profile has not become compellingly attractive, given its lower dividend yield offering of 4% (vs peers: 5%) and high foreign ownership level of c.30% (vs Maybank: c.18% & CIMB: c.26%) - making it susceptible to sell-offs. Besides, China’s proposal to impose the controversial Hong Kong security law does not instil confidence. Also, Public Bank’s high fixed auto financing exposure suggests it will be the hardest hit from the day 1 modification loss among large banks, if BNM does not give any form of dispensation.

Source: Hong Leong Investment Bank Research - 27 May 2020