• 2Q20 net profit of RM1bn (-24.8% yoy; -24.6% qoq) within our and consensus estimates; 1H20 net profit (RM2.33bn, -15% yoy) at 52.6% of our 2020E. 1H20 BAU net profit (ex-net ‘mod loss’ impact of RM498m) of RM2.7bn (-1.2% yoy).
• Quarters ahead remain uncertain, as we see downside risk on earnings from: i) continual proactive provisions; and ii) further rate cuts (25bps to 50bps).
• We make some minor adjustments to our earnings forecasts. Maintain HOLD with a revised TP of RM17.80. No 2Q20 DPS proposed (vs. 33 sen in 2Q19).

1H20 operating results (BAU basis) was intact, excluding impact of ‘mod-loss’

On a ‘BAU” basis, PBB’s 1H20 operating income grew 3.7% yoy, with fund-based income up 1.6% yoy (excluding a net ‘modification-loss’ of RM498.4m) while noninterest income was up 10.7% yoy (driven by brokerage and unit trust fees). Other key takeaways: i) 2Q20 NIM slipped 51bps qoq and 55bps yoy to 1.57% while 1H20 NIM stood at 1.83%. Excluding the net ‘mod-loss’ impact, 1H20 NIM would have been at 2.03% (-13bps yoy); ii) loans were up 1.3% ytd; iii) 2Q20 annualized net credit cost (NCC) spiked up to 18.4bps vs. 7.4bps in 1Q20 and 8.1bps in 2Q19, while 1H20 NCC was at 13bps (with 90% attributable to macro provisions and management overlays).

What to Expect Ahead? Downside Risks to Earnings Remain Down the Road

Downside risks to PBB’s earnings remain, from: i) continued proactive provisions, as delinquencies may rise for borrowers in the vulnerable sectors, after the loan moratorium period ends by September 2020. At worst, management expects GIL to rise to 1% from the current 0.4% (June30) while pushing NCC up from 15bps to 20-25bps for 2020E; ii) any further rate cuts. PBB’s NIM may see a 3bps compression for every 25bps rate cut (net profit impact at ~RM100m). Management expects a 20bps NIM compression (barring further rate cuts) while achieving at least a 10% ROE for 2020.

Maintain HOLD, Target Price Lowered to RM17.80 (from RM18.20)

We maintain our HOLD rating on PBB, with a lower 12-month TP of RM17.80 (based on a 1.43x P/BV on 2021E BVPS) underpinned by a 2021E ROE at 9.4% and cost of equity of 7.6%. We make some adjustments (-1.1% to +6.3%) to our 2020-22E earnings, with changes to loan growth (from -1% yoy in 2020E to 2.5% yoy) while raising our NCC further from 10bps to 21bps in 2020E. Our underlying assumptions for 2020-22E: loan growth 2.5-3% yoy, NIM at 1.94%-2.1%, net credit cost at 10-21bps, CIR 40-44%. Downside/upside risks: interest rate cuts/hikes; higher/lower impaired loan provisions.

Source: Affin Hwang Research - 1 Sept 2020