Public Bank’s (PBB) 2018 net profit of RM5.6bn (up a marginal +2.2% yoy) was in-line with market expectations and Affin’s. For 2018, there were no major surprises apart from a 6bps decline in NIM to 2.22% on weaker loan growth of 4.2% yoy while funding pressure continued to mount. This had resulted in a lacklustre 2018 pre-provision operating profit (PPOP) but lower provisions (-16.7% yoy) (given the sound asset quality with the GIL ratio at 0.5%) continued to aid PBB’s bottomline. A final dividend of 37 sen has been proposed, while total 2018 DPS stood at 69 sen (2017: 61 sen). We expect a sustained performance in 2019-2021E, with relatively flat net profit growth given a weaker NIM outlook (4-5bps compression) and modest loan growth (4.5% yoy). Reiterate HOLD, PT at RM23.50.

2018 net profit up 2.2% yoy; 4Q18 net profit down 5.4% yoy and 1.6% qoq

PBB reported a record year of profits in 2018, with net profit coming in at RM5.6bn (+2.2% yoy). Nonetheless, we saw a relatively flat sequential performance due to a weak operating income generation. PBB’s 2018 net income grew by a marginal 0.9% yoy as a result of lower non-interest income (- 5.0% yoy) while fund-based income grew by a modest 2.5% yoy arising from a 6bps net-interest-margin (NIM) compression yoy (to 2.22%) for 2018, largely attributable to funding cost pressure, though NIM pressure eased qoq in 4Q18. Operationally, loans were up +4.2% yoy, below industry growth (5.6% yoy) in Malaysia. 2018 CIR was up 1ppt to 33%, the GIL ratio has remained fairly low at 0.5%.

Loan Growth May Stay at Mid-single Digit, Sentiment Remains Soft

In our view, PBB’s loan growth outlook may stay soft (at circa 4.5% p.a. in 2018E-2020E, as we remain conservative on its retail loan growth (64% of group loans), which is also facing competition from other banks in the SME space. Though the operating outlook remains challenging, the economic fundamentals remain resilient to support private investments and consumption.

Reiterate HOLD, TP Unchanged at RM23.50

PBB remains a HOLD (with a 12-month TP unchanged at RM23.50 based on a 2.1x 2019E P/BV target) as we continue to foresee soft earnings outlook in 2019E-20E. Nonetheless, we value PBB at a premium against peers which are trading at 2019E’s P/BV average of 1.32x due to its higher 2019E ROE of 13.2% (peer average 10.3%), underpinned by its well-established retail banking and retail unit trust operations. Downside risks - further NIM compression (management’s guidance of c. -5bps). Upside risks – stronger loan growth.

Source: Affin Hwang Research - 21 Feb 2019