We foresee a modest 4Q18 for Public Bank (PBB), with net earnings expected to be relatively flat yoy and qoq. We believe that 4Q18 NIM pressure remains persistent against that of last year, due to a rise in funding costs while the pace of loan growth remains modest at midsingle digit growth yoy in 4Q18. Nonetheless, a moderation in fundbased income growth will be compensated by sustained non-interest income from fees/commissions, stable expenses and a low net credit cost (estimated <10bps). Reiterate HOLD with an unchanged Target Price of RM23.50 based on a 2019E 2.1x P/BV multiple target. The premium valuation against peers despite its soft earnings outlook is due to a well-established retail banking and retail unit trust operations in Malaysia.

Funding Cost Pressure Remains Persistent in 4Q18 and 2019

A slowdown in fund-based income growth was the key factor driving a moderation in PBB’s operating income in 2018, which is estimated to grow by 2.7% yoy (vs.a growth rate of 4.4-10% p.a. in the last 5 years). This is attributable to tapering-off in loans growth and to a larger extent the building up of deposit cost pressure, which was clearly reflected in 9M18’s results. PBB’s NIM had seen a pullback from an average of 2.28% in 2017 to 2.24% for 9M18, with 4Q18 expected to stabilize at around 3Q18’s NIM level of 2.16%. Given its on-going deposit campaign (since 4Q18 and ending Jan19), more cost pressure will be reflected over the next 6-12 months. In our view, PBB undertook this strategy to prevent attrition of deposits, of which could even cost more to raise in the future.

Sustainable Non-interest Income, Stable CIR and Low Credit Cost

PBB is expected to see a sustainable level of non-interest income (circa 21-22% of the group’s total net income) from fees and commission generation, largely driven by unit trust fees, banking transactions and bancassurance. As at Nov18, Public Mutual’s NAV stood at RM80.15bn with a market share of 38% and remains the top private unit trust firm. We also foresee a level of low net credit cost of circa 8bps p.a.in 2018E-2020E on the back of a sound loan book (as implied by a GIL ratio 0.5%, LLC at 272.6% in 9M18) and a prudent CIR level of 32-33%.

Source: Affin Hwang Research - 16 Jan 2019