Public Bank’s 2Q22 net profit was up 2% YoY, thanks to lower provision for bad loans. Besides, NIM widened sequentially, loans growth held steady, and asset quality was resilient. Overall, results were within expectations and hence, FY22- 24 forecasts were kept. We remain less bullish on Public Bank, considering its strong price performance YTD may limit returns going forward. Also, valuations are near mean, indicating that easy money has been made. Maintain HOLD and GGM-TP of RM4.80, based on 1.72x FY23 P/B.

Within expectations. Public Bank chalked in 2Q22 net profit of RM1.4bn (+1% QoQ, +2% YoY), bringing 1H22 sum to RM2.8bn (-3% YoY). This came in within estimates, making up 48-49% of our and consensus full-year forecasts.

Dividend. Declared 1st interim DPS of 8.0sen (vs 2Q21: 7.5sen). Ex-date: 13 Sept.

QoQ. The 20% drop in loan loss allowances, helped to mitigate the higher opex (+3%) which in turn, lifted earnings up by 1%. Also, top-line growth was tepid at 1%, despite net interest margin (NIM, +5bp) and loans expansion (+1.4%), no thanks to weak non interest income (NOII, -15%; poor showing across all line items).

YoY. Bottom-line increased 2% given lower provision for impaired loans (-80%), which offset negative Jaws (opex growth outpaced total income by 8ppt) and higher effective tax rate (+7ppt).

YTD. With total income falling 2%, opex rising 4%, and effective tax rate jumping 7ppt, net profit declined 3%. However, the drop in allowance for bad loans (-70%) provided some respite.

Other key trends. Both loans and deposits growth held steady at +4.5% YoY (1Q22: +3.7%) and +3.5% YoY (1Q22: +4.4% YoY) respectively. In turn, sequential loan-to deposits ratio (LDR) was unchanged at 95%. For asset quality, gross impaired loans (GIL) ratio remained flattish QoQ at 0.29%.

Outlook. Following Jul-22’s OPR hike, NIM is seen to continue expand sequentially. However, the magnitude may be capped by downward CASA mix normalization. That said, loans growth is expected to chug along for now, considering economic recovery is strong. Separately, GIL ratio is likely to rise but we are not overly concerned, since Public Bank has already made heavy pre-emptive provisioning in FY20-21 to cushion this impact. Furthermore, FY22-23 NCC assumption built in by both us and consensus are still fairly elevated (above the normalized run-rate but below FY20-21’s level).

Forecast. Unchanged since 2Q22 results were in line.

Retain HOLD and GGM-TP of RM4.80, based on 1.72x FY23 P/B with assumptions of 12.7% ROE, 8.6% COE, and 3.0% LTG. This exceeds the sector’s P/B of 0.92x but lower vs its 5-year mean of 1.77x. The premium/discount is warranted given its ROE output is 3ppt/1ppt above/below industry/its 5-year average. Overall, we remain less bullish on Public Bank, considering its strong share price performance YTD may limit returns going forward. Also, valuations are near mean, indicating that easy money has been made. Nonetheless, asset quality remains strong and we still believe it has large potential headroom to perform management provision overlay writebacks.

Source: Hong Leong Investment Bank Research - 30 Aug 2022