Public Bank net profit was up 20% YoY in 4Q21 given positive Jaws and lower loan loss provision. Also, NIM widened sequentially, loans growth held steady, and asset quality was resilient. Overall, results were within expectations but we cut FY22 earnings by 2% to factor in prosperity tax impact and raise FY23 profit by 6% to account for better top-line growth and lower loan loss allowances. We stay bullish on Public Bank given its strong asset quality. Keep BUY with higher GGM-TP of RM4.80 (from RM4.50), based on 1.71x FY23 P/B.

Within expectations. Public Bank registered 4Q21 net profit of RM1.4bn (+1% QoQ, +20% YoY), bringing FY21 sum to RM5.7bn (+8% YoY on a core basis, after stripping off modification losses in FY20). This was within estimate, making up 101-105% of our and consensus full year forecasts.

Dividend. Final DPS of 7.7sen was declared (4Q20: 13sen; FY21: 15.2sen vs FY20: 13sen). Ex-date: 11th March.

QoQ. The drop in impaired loan provision (-13%) helped to lift earnings up by 1%. We saw weak total revenue (-1%), no thanks to sluggish non-interest income (NOII, -9%), led by investment-related losses. That said, net interest margin (NIM) expanded 3bp during the quarter, providing some respite at the top.

YoY. Bottom-line spiked up 20% given positive Jaws (total income +1% vs opex -3%) and lower loan loss allowances (-49%). However, NOII fall of 20% (weakness across the board) capped overall profit from growing quicker.

YTD. Total income growth outpaced opex by 5ppt, created positive Jaws and boosted earnings by 8%. However, we note that the slightly faster increase in provision for bad loans (+9%) stunted bottom-line growth a little.

Other key trends. Both loans and deposits growth held steady at +3.6% YoY (3Q21: +3.3%) and +4.0% YoY (3Q21: +4.2% YoY) respectively. That said, sequential loanto-deposits ratio (LDR) ticked upwards 1ppt to 94%. For asset quality, gross impaired loans (GIL) ratio improved 2bp QoQ to 0.31%.

Outlook. Following seasonal deposit competition in 4Q, we expect sequential NIM to hold steady at current levels. That said, this is seen to expand when BNM hikes OPR later this year. Also, loans growth is expected to chug along given economic reco very. Separately, GIL ratio is likely to creep upwards but we are not overly worried as Public Bank has already made heavy pre-emptive provisioning in FY20-21 and in our view, credit risk has been passably priced in by the market, looking at the still elevated NCC assumption applied for FY22 by both us and consensus (above normalized run-rate but beneath FY20-21’s level).

Forecast. Despite the positive set of results, we cut FY22 earnings by 2% to factor in prosperity tax impact but raise FY23 profit by 6% to account for better top-line growth and lower loan loss provision.

Reiterate BUY but with higher GGM-TP of RM4.80 (from RM4.50), after rolling our valuations to FY23. This TP is based on 1.71x P/B (from 1.68x) with the assumptions of 12.6% ROE (from 11.7%), 8.6% COE, and 3% LTG. This is above the sector’s P/B of 0.92x but below its 5-year mean of 1.79x. The premium/discount is warranted given its ROE generation, which is 3ppt/1ppt over/beneath 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 - 28 Feb 2022