Public Bank’s 4Q20 net profit declined 18% YoY, no thanks to higher provision for bad loans. Also, GIL ratio inched up marginally. That said, NIM widened QoQ and loans growth held steady. Overall, results were broadly within expectations, save for better-than-anticipated dividends. However, we cut FY21-22 profit by 1- 2% to reflect new set of guidance and also built in a 25bp OPR reduction. All in, the stock’s risk-reward is still unattractive to warrant a rating upgrade, given its modest yield offering and high foreign shareholding level. Keep HOLD but with a lower GGM-TP of RM4.25 (from RM4.35), based on 1.66x FY21 P/B.

Within estimates. Public Bank posted 4Q20 net profit of RM1.1bn (-18% QoQ & YoY), bringing FY20 core sum to RM5.3bn (-5% YoY; after adjusting for the net modification loss in 2Q20). This was largely in line with expectations, making up 104% of our full-year forecasts but beat consensus at 110%; we believe key variance was from better-than-expected top-line growth.

Dividend. A final DPS of 13sen was declared (vs 4Q19: 8sen; FY20: 13sen vs FY19: 14.5sen). Ex-date: 11th March. This exceeded expectations as we forecasted DPS of 7.6sen while consensus was 9.9sen.

QoQ. The 2% drop in total income, 5% rise in opex, coupled with a 66% jump in loan loss provision, led to the 18% decline in net profit. At the top, we note that net interest margin (NIM) improved 9bp but was erased by weaker non-interest income (NOII) as it fell 8% due to poor treasury performance (-71%).

YoY. Positive Jaws from quicker total income growth (+6%) vs opex (+1%) was wiped out by the 13-fold spike in bad loan allowances. As such, bottom-line was down 18%.

YTD. Core earnings fell 5%, again on the back of higher bad loans provision (+7-fold). However, this was mitigated by robust NOII (+18%; better trading income) and Islamic Banking performance (+17%).

Other key trends. Loans growth held steady at 4.6% YoY (3Q20: +4.6%) while depo sits tapered 3.5% YoY (3Q20: +4.8%). In turn, sequential loan-to-deposits ratio (LDR) inched up to 94.5% (+37bp QoQ). As for asset quality, the gross impaired loans (GIL) ratio nudged up 3bp QoQ due the transport vehicle and working capital segments.

Outlook. We see NIM pressure returning (but will be short-lived) given budding 25bp OPR reduction in 1H21. However, lending growth is seen to chug along given strong mortgage and auto loan franchise. Separately, GIL has creeped upwards but we are not overly worried as Public Bank has made heavy pre-emptive provisioning in FY20 and we reckon credit risk has been adequately priced in by the market, looking at the high NCC assumption applied for FY21 by us and consensus (above the normalized run-rate but below FY20’s level). Moreover, we believe the Government and BNM will remain supportive in helping troubled borrowers, limiting a significant sag in GIL ratio.

Forecast. Although 4Q20 results were in line, we cut FY21-22 profit by 1-2% to reflect new set of management guidance and also built in a 25bp OPR reduction.

Retain HOLD but with a lower GGM-TP of RM4.25 (from RM4.35), following our profit cut and based on 1.66x FY21 P/B (from 1.67x) with assumptions of 11.1% ROE (from 11.2%), 7.9% COE, and 3.0% LTG. This is above the sector’s P/B of 0.86x but beneath its 5-year mean of 1.88x. The premium/discount is warranted given its ROE output, which is 3ppt/3ppt over/below industry/its 5-year average. In our view, the risk reward is unattractive enough given its: (i) modest yield offering of c.3% (larger peers: c.5%), and (ii) high foreign shareholding at c.28% (vs Maybank: 17% & CIMB: 21%).

Source: Hong Leong Investment Bank Research - 26 Feb 2021