Public Bank’s (PBB) 1Q20 net profit came in at RM1.33bn (-5.7% yoy and -5.5% qoq), within our expectations but below the consensus estimate. We anticipate moderation in the quarters ahead vis-à-vis 1Q20 on the back of: i) more NIM pressure kicking in following another 50bps OPR cut in 2Q20; ii) more pre-emptive provisioning that may be set aside (though buffered by its high LLC of 261.7%); iii) a potential ‘modification loss’ in the HP portfolio that may be recognized in 2Q20 (our estimate at ~RM913m). There are no changes in our 2020-22 earnings forecasts, which remain conservative relative to consensus. Reiterate SELL, PT unchanged at RM10.50 (0.86x 2021E P/BV target).

Operating Income Holding Up in 1Q20, But Outlook Likely to Weaken

PBB’s 1Q20 net profit of RM1.33bn (-5.7% yoy; -5.5% qoq) accounted for 30% of our full-year forecast and 24% of consensus. 1Q20 net operating income rose 2.1% yoy, largely driven by better non-interest income (+12.9% yoy), but fell 1.9% qoq. The two OPR cuts totalling 50bps in 1Q20 resulted in a 14bps yoy and 12bps qoq NIM compression to 2.05%, while weak gross loan growth of 0.7% ytd could not stem the decline in fund-based income (-1% yoy; -5.5% qoq). Overheads rose by 8.1% yoy (resulting in an uptick in the CIR to 35.7% from 33.8% in 1Q19) while the 1Q20 net credit cost (NCC) rose to 7bps vs. a credit recovery in 1Q19. Despite deterioration in asset quality seen at other banking peers, PBB maintained a stable GIL ratio of 0.5% as at 1Q20.

Outlook Remains Challenging; a Potential Modification Loss in 2Q20

Management has turned more conservative in its 2020 guidance: i) loan growth at circa 1-2%, in line with industry growth; ii) a total NIM compression of 15bps for a 100bps OPR cut (our assumption for 2020E is more conservative at -20bps decline); iii) NCC guidance of ~15bps maintained. Based on our assumption of PBB’s hire-purchase portfolio duration of 4.5 years and a 4.3% EIR, its ‘modification loss’ could be as much as RM913m, which may hit its net interest income in 2Q20 (impact not factored in yet).

Maintain SELL. PT Unchanged at RM10.50

We reiterate our SELL rating on PBB. Despite rolling over our valuation horizon to 2021E, our Price Target remains unchanged at RM10.50 (based on 0.86x P/BV target on 2021E BVPS), underpinned by a cost of equity of 10.6%. For 2021-22E, our NIM assumptions are 1.94-2.0% with the NCC at 10-12bps. Upside risks – lower delinquencies, rate hikes.

Source: Affin Hwang Research - 27 May 2020