Public Bank’s 4Q22 profit was up 8% QoQ due to stronger top-line growth along with the drop in opex and loan loss provision. Also, NIM expanded sequentially and loans growth held steady. However, GIL ratio was up QoQ. Overall, results beat estimates but we keep our forecasts for now. We find Public Bank’s risk reward profile to be balance as there are no new positive catalysts to spur share price upwards. Retain HOLD and GGM-TP of RM4.80, based on 1.72x FY23 P/B.

Beat estimates. Public Bank registered 4Q22 net profit of RM1.7bn (+8% QoQ, +24% YoY), bringing FY22 sum to RM6.1bn (+8% YoY). This beat our expectations, making up 106% of full-year forecasts but was in line with consensus (at 103%); key variance came from lower-than-expected loan loss provision.

Dividend. Declared 3rd interim DPS of 5sen (vs 4Q21: 7.7sen; FY22: 17sen vs FY21: 15.2sen). Ex-date: 13 March.

QoQ. Positive Jaws from stronger total income growth (+5%) and drop in opex (-4%), along with the decline in loan loss allowances (-6%), lifted earnings up 8%. At the top, we observed net interest margin (NIM, +16bp) and loans expansion (+0.9%) but was slightly capped by the weaker non-interest income (NOII, -4%; dragged by poor treasury and forex performance).

YoY. Profit increased 24% given positive Jaws (total income growth outpaced opex by 11ppt) and lower provision for impaired loans (-68%). However, higher effect tax rate (+9ppt) shaved away some earnings expansion.

YTD. The combination of total income growth (+7%) and smaller bad loan allowances (-70%), led to a bottom-line increase of 8%. Overall showing was again capped by the higher effective tax rate (+8ppt).

Other key trends. Both loans and deposits growth held steady at +5.3% YoY (3Q22: +5.7%) and +3.8% YoY (3Q22: +3.8%) respectively. That said, loan-to-deposits ratio ticked up by 1ppt sequentially to 96%. As for asset quality, gross impaired loans (GIL) ratio spiked 9bp QoQ to 42bp, no thanks to the commercial properties segment.

Outlook. We expect sequential NIM to shrink given: (i) repricing of matured deposits, (ii) CASA being utilized and substituted to FD, (iii) price competition for FD is still stiff, along with (iv) diminishing flexibility to optimize LDR (already at high levels of c.96%). Also, loans growth is seen to moderate due to a softer domestic macro environment. Besides, GIL ratio is likely to climb but we are not overly worried as we believe Public Bank is better equipped vs prior slumps; the large pre-emptive allowances built up in FY20-21 to battle Covid-19 pandemic woes and latency in credit loss from OPR hikes, act as robust buffer to cushion for any short-term asset quality weakness.

Forecast. Although 4Q22 results beat expectations, we keep our estimates for now.

Retain HOLD and GGM-TP of RM4.80, based on 1.72x FY23 P/B with assumptions of 12.8% ROE, 8.7% COE, and 3.0% LTG. This exceeds the sector’s P/B of 0.85x but in line with its 5-year mean of 1.73x. The premium is fair given its ROE output is 3ppt above industry’s average. Overall, Public Bank’s risk-reward profile is still balanced, in our opinion, as there are no fresh positive catalysts to spur share price upwards. We note tailwinds which were supposed to be enjoyed by banks (like big NIM expansion, strong credit growth) over 2022-23 have instead been frontloaded to last year, turning next 10 months to be less exciting. That said, its asset quality remains strong, capping the consumption of pre-emptive provisions and hence, this presents a larger potential headroom to perform writebacks instead.

Source: Hong Leong Investment Bank Research - 28 Feb 2023