Public Bank (PBB) stands out amongst peers by being a defensive, and steady bank, having the largest market share in the domestic retail lending and in the private unit trust industry to drive overall operating income growth. A sound loan book (as implied by a GIL ratio 0.5%, LLC at 256.3% in 9M17) and a prudent CIR level (32.8% as at 9M17) will remain as additional drivers. Meanwhile, we do not expect a detrimental impact to its earnings with the adoption of MFRS 9 standards. Maintain BUY, with PT of RM24.00 at a 2.3x P/BV multiple on 2018E’s BVPS of RM10.43 and 2018E ROE of 14.4%.

2018 Earnings to be Supported by Steady Domestic Operations

PBB will continue to see 2018 earnings sustained by sound domestic operations, underpinned primarily by retail banking, comprised of consumer and SME loans. Retail banking remains PBB’s key strength, contributing 53% of 9M17’s pre-tax profit while loans of this nature continued to grow faster at 4.9% yoy (as at Sept17) vs. other segments. We believe that loan growth in 2018 is expected to be marginally better than 2017 with the focus on beefing up working-capital loans.

Public Mutual - 2018 to Turn More Aggressive?

Fund management arm Public Mutual (PM) contributes 9% to group pretax profit (9M17) and it has maintained its No.1 position (41.8% market share) amidst strong competition, though its market share has fallen from the peak of almost 50% back in 2013-15. We believe that PM will step up marketing campaigns to claw back its market share in 2018.

MFRS 9 Impact Should Not be Detrimental to Profits

Though we have not priced in the potential impact of MFRS 9 into our forecasts, given PBB’s sound asset quality (GIL ratio 0.5%), the amount of allowances to be set aside or its credit cost should not see a significant spike, should default levels remain low, which we expect.

Reaffirm BUY Rating, PT Unchanged at RM24.00

Reaffirm BUY on PBB, with a 12-month PT of RM24.00 based on a 2.3x 2018E P/BV multiple. For 2018E, we expect a fund-based income growth of +5.2% yoy, with NIM at 2.25%. Potentially, a policy rate hike (of 25bps) will augur well for PBB given its high percentage of variable rate loans (at 77% of loanbook), with a potential impact of +2% on 2018E’s net earnings. Downside risks – moderation in fee income growth and weaker NIM.

Source: Affin Hwang Research - 19 Jan 2018