Public Bank (PBB) reported a marginally better 4Q19, with net profit up 3.2% qoq to RM1,405.9m while full-year net profit of RM5.51bn came in 1.4% lower yoy. Overall, the operating results were within our and market expectations. There was not much excitement in 2019 due to the impact of the 25bps OPR cut, which resulted in some NIM pressure (down 7bps yoy to 2.15%) while gross loans grew by 4.1% yoy in 2019 (almost similar to 2018). Meanwhile, CIR continued creeping up from 33% (2018) to 34.4% in 2019, as the group saw a negative JAWS ratio of 4.5%. For 4Q19, management proposed a higher DPS of 40 sen (4Q18: 37 sen) as PBB’s capital position remains solid. As we factor-in the impact of a 50bps OPR cut for 2020E/21E, we revise down our net profit forecasts by 4.4%/3.7%. For 2020, management is guiding for an ROE target of 13%, loan growth at 4% (vs. our forecast of 3%) and NIM compression of 5-10bps. Reiterate HOLD, PT lowered to RM18.00.

2019 Net Profit Down 1.4% Yoy, Led by Weaker Operating Income

PBB reported a 2019 net profit of RM5,511.5m (-1.4% yoy), while 4Q19 net profit saw a marginal growth of 3.2% qoq due to a recovery in fund-based income and higher non-interest income. Results were within our and market expectations. The mediocre 2.4% yoy growth in net operating income was negated by the inevitable increase in its overheads (+6.9% yoy in 2019), largely due to personnel and establishment costs. During the year, NIM dipped by 7bps yoy to 2.15% subsequent to the 25bps OPR cut.

PBB’s KPI for 2020 Appears More Optimistic Than Our Projections

Despite a more challenging outlook in 2020, management is guiding for an ROE target of 13% (vs. our forecast of 11.7%), loan growth at 4% given its sustainable pipeline (vs. our more cautious projection of 3%) and NIM compression of 5-10bps (taking into account a total of ~50bps rate cut). Meanwhile, PBB’s loans with direct impact from the business slowdown due to the Covid-19 outbreak accounts for approximately 2% of its loanbook and management is taking proactive actions to assess these accounts.

Reiterate HOLD, PT Revised Down to RM18.00 (from RM20.00)

We maintain a HOLD rating on PBB, with a revised 12-month PT of RM18.00 (based on 1.53x 2020E P/BV target) from RM20.00 (at 1.66x 2020E P/BV target). Our premium valuation for PBB against the peer average of 1.0x is due to its higher ROE of 11.7% (vs. peer average 9-10%) and its strong retail franchise. Downside risks - further NIM compression. Upside risks – higher loan growth and interest rate hikes.

Source: Affin Hwang Research - 27 Feb 2020