Public Bank’s 2Q21 bottom-line was flat YoY as positive Jaws from quicker total income growth was largely erased by the spike in loan loss provision. Also, NIM contracted sequentially. However, loans growth held steady & asset quality was resilient. Overall, results were within estimates. That said, we still cut FY21 net profit by 5% as management guided higher NCC but we keep FY22 -23 forecasts unchanged. We stay bullish on Public Bank given its strong asset quality. Also, it has been traditionally favoured by foreign investors seeking to gain exposure to Malaysian banking stocks. Retain BUY call and GGM-TP of RM4.50, based on 1.68x FY22 P/B.

Within estimates. Public Bank registered 2Q21 net profit of RM1.4bn (-10% QoQ, flat YoY on a core basis, after removing modification losses in 2Q20), bringing 1H21 sum to RM2.9bn (+8% YoY). This came in within expectations, forming 51-52% of our and consensus full-year forecasts.

Dividend. 1st interim DPS of 7.5sen was declared (vs 2Q20: nil). Ex-date: 13 Sept.

QoQ. Weak total income (-1%) along with higher loan loss provision (doubled) caused earnings to fall 10%. At the top, non-interest income (NOII) declined 5%, no thanks to weaker fees (-12%) and investment-related showing (-16%). Also, net interest margin (NIM) contracted 2bp.

YoY. Bottom-line was flat as positive Jaws from quicker total income growth vs opex (+7ppt) was largely erased by the 2.6x spike in bad loan allowances.

YTD. The 8% rise in net profit was led by positive Jaws (total income expanded 10ppt faster than opex). However, the 2.8x increase in provision for impaired loans, capped overall growth.

Other key trends. Both loans & deposits growth held steady at 5.2% (1Q21: +5.1%) and 4.2% YoY (1Q21: +3.8%) respectively. However, the sequential loan-to-deposits ratio (LDR) nudged down 1ppt to 94%. As for asset quality, gross impaired loans (GIL) ratio was unchanged at 0.35%.

Outlook. We expect NIM to remain stable, premised on no OPR cut (since it is already at an all-time low) and limited scope for further CASA expansion. Also, loans growth is seen to chug along given gradual economic reopening under the National Recovery Plan. 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). Moreover, we believe the Government and BNM will stay supportive in helping troubled borrowers, limiting a significant deterioration in GIL ratio.

Forecast. Despite in line results, we cut FY21 profit by 5% as management guided for higher NCC but we keep FY22-23 estimates unchanged.

Maintain BUY and GGM-TP of RM4.50, based on 1.68x FY22 P/B with assumptions of 11.7% ROE, 8.2% COE, and 3.0% LTG. This is above the sector’s P/B of 0.88x but beneath its 5-year mean of 1.84x. The premium/discount is warranted given its ROE generation, which is 2ppt/2ppt over/below industry/its 5-year average. We stay bullish on Public Bank given its strong asset quality. Also, it has been traditionally favoured by foreign investors seeking to gain exposure to Malaysian banking stocks.

Source: Hong Leong Investment Bank Research - 30 Aug 2021