Public Bank’s (PBB) 1H18 net profit of RM2.8bn (+8.6% yoy) was broadly in line with our estimate but below consensus. In our view, 2Q18 was another favourable quarter, underpinned by sustainable fund-based income (+2.6% yoy), though the 2Q18 NIM normalized to 2.24% from 2.33% in 1Q18 (as the deposit cost started repricing upwards). Given the relatively sound asset quality versus peers, its credit cost stayed at a low 6bps for 1H18. While industry credit demand may pick up in 2H18, potentially from better consumer/business sentiment, competition in the banking space may intensify. We believe, however, that management will not resort to excessive risk-taking, which would result in further discounts on rates, but will work towards preserving its NIM. We maintain our forecasts, BUY rating and 12-month PT of RM26.30.

2Q18 Net Profit +4.8% Yoy; Operationally Flat, Lower Allowances

PBB reported a 2Q18 net profit of RM1,396m (+4.8% yoy; -0.7% qoq) while 1H18 net profit was up 8.6% yoy to RM2.8bn. Overall, the results were broadly within our estimates but came in below consensus. PBB’s 2Q18 operating income grew by a marginal 1.0% yoy and was down 3% qoq as a result of weaker non-interest income (-5% yoy; -10.2% qoq) that was partly offset by higher fund-based income. Meanwhile, lower allowances (-34% yoy; -74.4% qoq) helped prop up the net profit (+4.8% yoy; -0.7% qoq).

2Q18 NIM Normalized; CIR Sustained; Loan Growth at 4.1% Yoy

There were no surprises in the 2Q18 and 1H18 operating results, as implied by a normalized 2Q18 NIM of 2.24% (down from 2.33% in 1Q18 as deposit rates are repriced up the post-OPR hike), and the 1H18 cost-toincome ratio of 33.1% (1H17: 33.8%). Group loan growth stayed healthy at 4.1% (annualized) in 1H18, while deposits grew by 6.7% (annualized).

Reaffirm BUY Rating, PT Maintained at RM26.30

We reaffirm our BUY rating with a 12-month PT of RM26.30, based on a P/BV of 2.3x on the 2019E BVPS of RM11.38. 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% and deposit growth forecast at 4%. Downside risks to our forecasts include the chance of a NIM compression (management’s guidance of low to mid-single digit), higher-than-expected deposit growth and more intense competition in the loan market (resulting in price-discounting).

Source: Affin Hwang Research - 16 Aug 2018