Public Bank (PBB) reported a 1Q18 net profit of RM1,405m (+12.6% yoy; -5.4% qoq), in-line with Affin’s and consensus estimate. There were no negative surprises and the impact from the adoption of MFRS 9 on Day-1 was without any issues, as the requirement for additional allowances was fulfilled through the transfer from regulatory reserves. NIM expansion (+2bps yoy; +6bps qoq), minimal net credit cost (9bps), a relatively-low cost-to-income ratio (32.6%) were the key drivers in 1Q18. 2018’s outlook will be driven by steady NIM of 2.32%, recovery in loan growth (our forecast 5.0% yoy) and expansion in fee income. Maintain BUY, PT raised to RM26.30 (2.3x CY19E P/BV target).

1Q18 a Robust Quarter, Net Profit +12.6% Yoy

Public Bank Berhad (PBB) saw another robust quarter in 1Q18, with net profit at RM1,405m (+12.6% yoy), though on a qoq, it was down by 5.4% due to higher recoveries and lower overheads in 4Q17. Overall, the results were within our and consensus estimates. PBB’s 1Q18 operating income (+6.6% yoy) was underpinned by: i) fund-based income of RM2.16bn (+4.4% yoy); and ii) non-interest income RM594.7m (+15.6% yoy). A relatively modest loan growth (+3.4% yoy) continued to drive fund-based income growth, which also had a boost from the OPR hike in Jan18 (1Q18 NIM +6bps qoq and +2bps yoy to 2.33%). 1Q18 CIR came in at 32.6%, below that of management’s target of 33-34%.

MFRS 9 Day-1 Financial Impact Remains Minimal on Capital

Given the availability of RM2,376m in regulatory reserves as at Dec17, PBB has utilized RM424m to meet the additional requirement of a 32% increase in additional impaired loan allowances under MFRS 9. There was also no material impact on capital ratios – CET 1, Tier 1 and TCR has remained steady at 12.2%, 12.8% and 15.8% against its position as at 31 Dec17. With the transition to MFRS 9, there was also not much difference in 1Q18 net credit cost, which stood at an annualized 9bps vs. 9bps in 1Q17 and 6.8bps in 4Q17.

Reaffirm BUY Rating, PT Raised to RM26.30 From RM24.50

Reaffirm BUY on PBB, with a higher 12-month PT of RM26.30 based on a 2.3x 2019E P/BV multiple (from RM24.50, based on a 2.55x 2018E P/BV target). For 2018E, we expect a fund-based income growth of +10% yoy, coupled with a 5-6bps NIM improvement yoy to 2.33% at our loan growth projection of 5% for PBB and deposit growth forecast at 4%.

Source: Affin Hwang Research - 3 May 2018