• 3Q20 net profit of RM1.39bn (+2.2% yoy; +39% qoq) and 9M20 net profit of RM3.7bn (-9.3% yoy) beat our expectations though in-line with the street. This quarter saw the absence of the chunky Day-1 mod-loss impact, higher noninterest income vs. 2Q20, more robust loan growth (+2.3% qoq).
• Provisions continued to rise (3Q20 annualized NCC at 39.5bps; 9M20: 22bps annualized) in 3Q20 as PBB continues to buffer up. 4Q20’s NCC is expected to rise to an annualized 64bps (based on full year guidance of 30-35bps).
• Maintain HOLD with our 12-month TP raised to RM18.60 (from RM17.80) as we raised 2020E/21E/23E net earnings by +7.2%/+7.5%+5.1%.

9M20 operating results flat yoy driven by recovery in 3Q20 operating income

PBB’s 3Q20 operating income recovered +28.7% qoq and +11.9% yoy, given the absence of the chunky Day-1 mod-loss (as seen in 2Q20) on fund-based income (which also recovered 37.2% qoq and +4.8% yoy) while non-interest income was up 9.9% qoq and +37.5% yoy (driven by brokerage and unit trust income). For 9M20, net operating income was flat yoy, as the improved non-interest income (+22% yoy; driven by robust investment income) was offset by weaker fund-based income (-5.9% yoy). 3Q20 NIM recovered, +52bps qoq while 9M20 NIM was down 23bps yoy to 1.92%. Meanwhile, loans continued to pick-up qoq (+2.3%) while up +4.6% yoy (+3.6% ytd).

More buffers needed, in the event of a spike in default cases

We have raised our provision assumptions to a more elevated level in 2020E/21E/22E, with net credit cost at 32.6bps/28.4bps/24.6bps (revised from NCC of 10-21bps previously). Our assumptions are largely pre-emptive in nature and we are of the view that additional buffers are required should there be a spike in default among the lower income (B40) and certain SME customers. PBB’s expected credit loss (ECL) allowances of RM2.33bn (comprising Stage 1 at RM1.26bn; Stage 2 RM815.8m) and regulatory reserves of RM1.7bn appear sufficient to buffer against a 1% impairment of its loanbook value, but we believe it is prudent for management to raise its loan loss cover further.

Maintain HOLD, target price raised to RM18.60 (from RM17.80)

We maintain our HOLD rating on PBB, with a revised 12-month TP of RM18.60 (based on a 1.48x P/BV on 2021E BVPS) underpinned by a 2021E ROE at 10% and cost of equity of 7.9%. Our earnings revisions of +7.2%/+7.5%/+5.1% to our 2020E/21E/22E are driven by better fund-based income on higher loan growth, lower funding cost and improved non-interest income, though offset by higher provisions. Our underlying assumptions for 2020-22E: loan growth 4.0-4.5% yoy, NIM at 1.94%-2.1%, net credit cost at 25-33bps, CIR 36-37%. Downside/upside risks: interest rate cuts/hikes; higher/lower impaired loan provisions.

Source: Affin Hwang Research - 30 Nov 2020