Public Bank (PBB) reported a 4.5% yoy and 5.5% qoq decline in 2Q19 net profit, due to the impact of the OPR cut (effective 8 May 2019). 1H19 net profit of RM2.74bn (-2.1% yoy), accounted for 49% of our 2019E forecast and 48% of street estimates, and deemed in-line with expectations. It was another subdued quarter in 2Q19, as reflected by frail group loan growth of +1% qoq (4.0% annualized), NIM compression of 7bps qoq and weak 1H19 net operating income (-1.1% yoy). Pressure from operating expenses continued to build up, and this was reflected in a higher costto-income ratio of 34.2% (+1.1ppts). We expect a subdued outlook in 2019- 2021E, underpinned by a relatively flat net profit growth driven by NIM compression and modest loan growth (4.5% yoy). Reiterate HOLD, PT unchanged at RM23.50.

1H19 Net Profit of RM2.74bn (-2.1% Yoy). 2Q19 -4.5% Yoy and -5.5% Qoq

PBB reported a 1H19 net profit of RM2,743m, -2.1% yoy, while 2Q19 net profit declined by 4.5% yoy and 5.5% qoq due to weaker fund based income generation and higher allowances. Results were within our and market expectations, as we expect a normalization in NIM in the coming quarters as downward repricing of deposit rates takes effect. In 2Q19, we saw PBB’s fundbased income decline by 1.6% qoq (1.0% yoy) as NIM contracted by 7bps qoq to 2.12%. Meanwhile, 1H19 net operating income rose by a marginal 1.1% yoy on higher non-interest income (+8.1% yoy). Cost pressure (+4.7% yoy) continued to build up from salaries and establishment costs, driving CIR up to 34.2% (1H18: 33.1%).

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

We remain conservative on PBB’s loan growth, forecasting a growth rate of 4.5% p.a. in 2019E-2021E, as we believe that the group’s retail loan growth (64% of group loans), will remain subdued due to competition and cautious sentiments. Its asset quality remains intact, as implied by a GIL ratio of 0.5%.

Reiterate HOLD, TP Unchanged at RM23.50

PBB remains a HOLD (with an unchanged 12-month TP of RM23.50 based on a 1.94x 2020E P/BV target). We continue to value PBB at a premium against peer average of 1.16x) due to its above average ROEs of 12-13% (vs. peer average 10.1%), underpinned by a well-established retail banking and retail unit trust operations. Nonetheless, earnings outlook in 2019E-20E is expected to remain lacklustre arising from NIM compression and softer business sentiment. Downside risks - further NIM compression. Upside risks – stronger loan growth.

Source: Affin Hwang Research - 15 Aug 2019