Public Bank’s 3Q20 Core Profit Ticked Up 1% QoQ as Better Total Income Growth Was Erased by Higher Loan Loss Provision. However, NIM Expanded Sequentially and Loans Grew at a Faster Clip. Overall, Results Beat Expectations Due to Betterthan-expected Contribution From Islamic Banking and NOII; Thus, We Raise FY20- 22 Profit Forecast by 6-10%. In Our View, the Stock’s Risk-reward Is Unattractive Enough to Warrant a Recommendation Upgrade, Given Its Modest Yield Offering and High Foreign Shareholding Level. Keep HOLD But With a Higher GGM-TP of RM19.70 (from RM15.90), Based on 1.52x FY21 P/B.

Above expectations. Excluding net modification loss (in 2Q20), Public Bank posted 3Q20 core net profit of RM1.4bn (+1% QoQ, +2% YoY), bringing 9M20 sum to RM4.1bn (flat YoY). This beat expectations, forming 89% of both our and consensus full-year forecasts. Key variance came from better-than-expected income contribution from Islamic banking and non-interest income (NOII).

Dividend. None Declared as Public Bank Only Divvy in 2Q and 4Q.

QoQ. The 7% increase in total income and stringent cost controls (opex -2%), led to a minor 1% rise in core profit; the doubling of loan loss provision capped performance. At the top, NOII rose 11%, mainly on better fees and other income. Also, net interest margin (NIM) expanded 3bp.

YoY. Positive Jaws from quicker total income growth (+12%) vs opex (-1%) have lifted core net profit up by 2%. Again, the spike in impaired loan allowances (+7x) prevented a stronger growth.

YTD. Core bottom-line growth was flat due to higher bad loans provision (+5x); it was mitigated by robust NOII (+18%), thanks to better investment-related showing.

Other key trends. Both loans and deposits grew at faster clip to 4.6% (2Q20: +3.4%) and 4.8% YoY (2Q20: +3.1%) respectively. However, the sequential loan-to-deposits ratio (LDR) was still elevated at 94% (+1ppt QoQ). As for asset quality, gross impaired loans (GIL) ratio improved 7bp QoQ, given the effect of loan moratorium.

Outlook. We see subsiding NIM pressure as OPR is already at all-time low. Besides, downward deposit repricing should aid gradual NIM recovery. Also, lending growth is seen to chug along despite Covid-19 headwinds given strong mortgage and auto loan franchise. Separately, we expect GIL ratio to remain at low levels in 1H21 as troubled borrowers can get targeted assistance from Public Bank; however, it may mask actual damage and cause a lag in NPL formation if the situation does not improve swiftly. As such, management is likely to step up their pre-emptive provisioning in the short-haul but it will drop and normalize progressively.

Forecast. With the strong set of results, we raise FY20-22 profit forecast by 6-10% to factor higher NOII and Islamic banking contribution.

Retain HOLD but with a higher GGM-TP of RM19.70 (from RM15.90), following our upward profit revision and based on 1.52x FY21 P/B (from 1.25x) with assumptions of 11.2% ROE (from 10.7%), 8.4% COE (from 9.1% to reflect risk-on mode and sector rotation into recovery stocks), and 3.0% LTG. This is above the sector’s P/B of 0.86x but beneath its 5-year mean of 1.91x. The premium/discount is justified given its ROE output, which is 3ppt/4ppt over/below industry/its 5-year average. In our view, the riskreward is unattractive enough given its: (i) modest yield offering of c.3% (larger peers: c.5%), and (ii) high foreign shareholding level at c.28% (vs Maybank: 17% and CIMB: 21%).

Source: Hong Leong Investment Bank Research - 30 Nov 2020