Public Bank’s 1Q21 net profit rose 33% due to positive Jaws and lower bad loan provision. Besides, NIM expanded QoQ, loans growth gained traction, and asset quality was resilient. Overall, results came in at the upper-end of estimates and hence, we raise FY21-22 bottom-line by 5%; also, we introduced FY23 forecasts. Separately, we turn bullish on Public Bank given price weakness over the past 2 months. Also, its strong asset quality may attract investors to take shelter in a more defensive banking stock, especially with MCO 3.0 uncertainties. Upgrade to BUY with higher GGM-TP of RM4.50 (from RM4.25), based on 1.67x FY22 P/B.

Upper-end of expectations. Public Bank posted 1Q21 earnings of RM1.5bn (+33% QoQ, +15% YoY). This came in at the upper-end of expectations, making up 28-29% of both our and consensus full-year forecasts; the stronger net interest margin (NIM) contributed to the better overall bottom line growth.

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

QoQ. Positive Jaws generated from the 7% rise in total income coupled with the 64% drop in impaired loan allowances, helped Public Bank’s earnings to spike 33%. At the top, NIM expanded 18bp on the back of stronger CASA growth and downward deposit repricing. However, non-interest income (NOII) was relatively flat during the quarter as better fee performance (+10%) was erased by smaller forex gains (-62%).

YoY. Net profit increased 15%, again thanks to positive Jaws as total income growth (+15%) outpaced opex (+3%); we note that NIM widened 20bp, loans grew 5%, and NOII rose 17% (supported by fee income, which jumped 35%). However, these were capped by the tripling in provision for bad loans.

Other key trends. Both loans and deposits growth gained momentum to 5.1% (4Q20: +4.6%) and 3.8% YoY (4Q20: +3.5%) respectively. However, the sequential loan-to deposits ratio (LDR) was still elevated at c.95% (flat QoQ). As for asset quality, gross impaired loans (GIL) ratio held steady at 0.35% (vs 4Q20: 0.36%).

Outlook. We expect NIM to remain stable premised on no OPR reduction (since it is already at an all-time low) and benign deposit rivalry in 2021. Also, lending growth is seen to chug along despite MCO 3.0 implementation given strong mortgage and auto loan franchise. Separately, GIL ratio is likely to creep up 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 both us and consensus (above the normalized run rate but below FY20’s level). Furthermore, we believe the Government and BNM will remain supportive in helping troubled borrowers, limiting a significant sag in GIL ratio.

Forecast. Since 1Q21 results were at the upper-end of expectations, we raise FY21- 22 earnings by 5% to account for stronger NIM and reverse the 25bp OPR cut that we had earlier baked into our projections. Also, we introduced FY23 estimates.

Upgrade to BUY with higher GGM-TP of RM4.50 (from RM4.25), following our uplift in profit and roll valuations to FY22. The TP is based on 1.67x P/B (from 1.66x) with assumptions of 11.7% ROE (from 11.1%), 8.2% COE, and 3% LTG. This is above the sector’s P/B of 0.89x but beneath its 5-year mean of 1.88x. The premium/discount is warranted given its ROE output, which is 2ppt/2ppt over/below industry/its 5-year average. We are turning bullish on Public Bank given price weakness over the past 2 months. Also, its strong asset quality may attract investors to take shelter in a more defensive banking stock, especially with MCO 3.0 uncertainties.

Source: Hong Leong Investment Bank Research - 12 May 2021