Public Bank’s (PBB) 1Q19 net profit of RM1.4bn (flat yoy and qoq) was in line with Affin’s and market expectations. 1Q19 appeared to be a subdued quarter, as reflected by modest group loan growth of 1% qoq (3.9% annualized), while NIM continued to hold up at 2.19% vs. 4Q18’s 2.18%. Pressure from operating expenses continued to increase, but its cost-to-income ratio (+1.2ppts) of 33.8% remains below the industry average of 44.6%. The group saw a credit recovery in 1Q19, which underpinned a marginally improved pre-tax profit of RM1.8bn (+1.4% yoy; +1.7% qoq). 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 unchanged at RM23.50.

1Q19 Net Profit of RM1.4bn Flat on a Yoy and Qoq Basis

PBB reported a RM1,410m net profit, which was relatively flat on a qoq and yoy basis. Results were within our and market expectations. PBB’s 1Q19 net income was down 0.7% yoy as a result of lower non-interest income (-1.6% yoy) while fund-based income was down 0.4% yoy (due to a significant NIM compression of 14bps yoy, from 2.33% to 2.19%). Funding cost pressure continued to build up, as a result of its deposit cost pressure and higher amount of debt capital raised (vis-à-vis 1Q18). Pressure from operating expenses continued to increase (+2.8% yoy; +4.4% qoq), but its 1Q19 cost-toincome ratio (+1.2ppts) of 33.8% remained below the industry average of 44.6%.

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 facing stiff competition. 1Q19 appeared to be a subdued quarter, as reflected by a group loan growth of 1% qoq or 3.9% (annualized).

Reiterate HOLD, TP Unchanged at RM23.50

PBB remains a HOLD (with an unchanged 12-month TP of RM23.50 based on a 2.1x 2019E P/BV target) as we continue to foresee a soft earnings outlook in 2019E-20E from NIM compression and softer business sentiment. Our premium valuation for PBB against peers (P/BV average of 1.26x) is 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. Upside risks – stronger loan growth.

Source: Affin Hwang Research - 30 Apr 2019