Public Bank’s 3Q22 profit was up 12% QoQ, thanks to stronger top-line growth; we saw NIM and loans expansion, along with higher forex gains. However, GIL ratio ticked up sequentially. Overall, results were within expectations and thus, forecasts were unchanged. We are still not bullish on Public Bank since sector tailwinds are dissipating and investment fatigue is building up on the banking sector, hence, limiting price performance. Retain HOLD and GGM-TP of RM4.80, based on 1.72x FY23 P/B.

Within estimates. Public Bank posted 3Q22 net profit of RM1.6bn (+12% QoQ, +17% YoY), bringing 9M22 sum to RM4.4bn (+3% YoY). This was within estimates, making up 75-76% of our and consensus full-year forecasts.

Dividend. Declared 2nd interim DPS of 4.0sen (vs 3Q21: nil; 9M22: 12.0sen vs 9M21: 7.5sen). Ex-date: 14 Dec.

QoQ. Positive Jaws from robust top-line growth (+9%), lifted earnings up by 12%; this was thanks to net interest margin (NIM, +13bp) and loans expansion (+1.5%), coupled with stronger forex gains (+6-fold). That said, higher loan loss allowances (+20%) and effective tax rate (+1ppt) capped bottom-line from rising faster.

YoY. Profit increased 17% given positive Jaws (total income growth outpaced opex by 2ppt) and lower provision for impaired loans (-70%). However, higher effective tax rate (+8ppt) again shaved away some earnings expansion.

YTD. The combination of total income growth (+3%) and smaller bad loan allowances (-70%), led to a bottom-line increase of 3%. Overall showing was again capped by the higher effective tax rate (+8ppt)

Other key trends. Both loans and deposits grew faster at +5.7% YoY (2Q22: +4.5%) and +3.8% YoY (2Q22: +3.5% YoY) respectively. However, the loan-to-deposits ratio (LDR) was unchanged sequentially at 95%. As for asset quality, gross impaired loans (GIL) ratio ticked up 4bp QoQ to 0.33%, no thanks to the corporate segment.

Outlook. We see smaller sequential NIM expansion given: (i) bulk of the FD typically will be repriced 6-9 months from the first OPR hike (kick-started in May-22), (ii) CASA being consumed and substituted to FD, along with (iii) price competition for FD. That said, loans growth is expected to chug along for now. Separately, GIL ratio is likely to rise but we are not overly concerned, since Public Bank has already made heavy pre emptive provisions in FY20-21 to cushion this impact. Also, FY22-23 NCC assumption built in by both us and consensus remained fairly elevated (above the normalized run rate but below FY20-21’s level).

Forecast. Unchanged since 3Q22 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 0.90x but lower vs its 5-year mean of 1.77x. The premium/discount is warranted given its ROE output is 3ppt/1ppt above/beneath industry/its 5-year average. Overall, we are still not bullish on Public Bank since sector tailwinds are dissipating and investment fatigue is building up towards the banking sector, thus, limiting price performance. Nonetheless, asset quality remains strong, capping the consumption of pre-emptive provisions and in turn, presents a larger potential headroom to perform writebacks instead.

Source: Hong Leong Investment Bank Research - 1 Dec 2022