Public Bank’s 2Q20 core earnings rose 4% due to better total income and strict cost control. Also, asset quality was steady. However, NIM slipped sequentially and loans growth tapered. Overall, results were line but with weaker guidance, we cut FY20 profit by 6% but maintain FY21-22 estimates. We still find its risk reward profile skewed to the downside, primarily on rich valuations. Contrary to popular belief, we also do not think it is more insulated than peers on potential asset quality weakness. Maintain SELL and GGM-TP of RM14.80, based on 1.17x FY21 P/B.

Within expectations. Excluding net modification loss, Public Bank posted 2Q20 core net profit of RM1.4b (+4% QoQ & YoY), bringing 1H20 sum to RM2.7b (-1% YoY). This was within expectations, making up 56-57% of both our and consensus full-year forecasts.

Dividend. Surprisingly, none declared (vs 2Q19: 33sen) as management takes a wait and see approach, before divvying in 4Q.

QoQ. The 4% increase in total income and stringent cost controls (opex -3%), led to a 4% rise in core earnings; this was despite a 3-fold jump in impaired loan allowances. At the top, non-interest income (NOII) rose 13%, mainly on better investment-related performance and forex gains. However, net interest margin (NIM) shrank 10bp.

YoY. Positive Jaws from quicker total income growth (+5%) vs opex (+1%) have lifted core net profit up by 4%. Again, bad loans provision capped overall performance as it doubled during the quarter.

YTD. Public Bank’s core bottom-line ticked down 1% due to higher loan loss provision (+4-fold); this was mitigated by higher NOII (+8%), thanks to better investment-related showing.

Other key trends. Both loans and deposits growth momentum slowed to 3.4% (1Q20: +3.9%) and 3.1% YoY (1Q20: +3.5%) respectively. However, the sequential loan-to deposits ratio (LDR) was still elevated at 93% (-1ppt QoQ). As for asset quality, gross impaired loans (GIL) ratio improved 6bp QoQ, given the effect of loan moratorium.

Outlook. With potentially another OPR reduction (-25bp) in 2H20, we believe this will continue to exert pressure on NIM. Also, loans growth is anticipated to remain tepid as Covid-19 related headwinds drag performance. Separately, we see GIL ratio to stay at low levels for the rest of the year, considering troubled borrowers will receive targeted assistance from Public Bank; however, this may hide actual damage and cause a lag in non-performing loan (NPL) formation if the situation does not improve rapidly or an advent of Covid-19 second wave paralyses the country again.

Forecast. Although 2Q20 results were within expectations, we cut FY20 profit by 6% as management is guiding for higher NIM slippage and net credit cost. However, we left our FY21-22 estimates unchanged as our forecasts seem reasonable for now.

Retain SELL and GGM-TP of RM14.80, based on 1.15x FY21 P/B with assumptions of 10.7% ROE, 9.6% COE, and 3.0% LTG. This is above the sector’s P/B of 0.78x but beneath its 5-year mean of 1.98x. The premium/discount is justified by its ROE output, which is 3ppt/4ppt over/below industry/its 5-year average. In our view, the stock’s risk reward profile is still skewed to the downside, primarily on rich valuations. Contrary to popular belief, we also do not think it is more insulated than peers on potential asset quality deterioration from Covid-19 woes; the level of Stage 1 and 2 provisioning is not particularly high.

Source: Hong Leong Investment Bank Research - 1 Sept 2020