Journey to Wealth
Public Bank - Accounting adjustments way above expectations BUY
- We are maintaining our BUY rating on Public Bank Bhd (PBB),with an unchanged fair value of RM16.70/share. This is based on a revised ROEfor FY12F of 22.9% (vs. 23.2% previously), but a higher book value atRM5.00/share (vs. RM4.94/share previously). This leads to a fair P/BV of 3.3x.
- PBB' 1Q if annualised are in line with our estimates, but about1.1% above consensus forecast. However, taking into account that PBB's 1Q isusually the slowest quarter (due to a shorter February working month), we wouldconsider 1Q to be ahead for expectations.
- In terms of full adoption of FRS139 accounting standard, theadjustment has been much more positive than what we had earlier anticipated.Collective assessment, as a percentageof gross loans less individual assessment balance carried forward, has now beenadjusted down to 0.8% from 1.5%. This is lower than our forecast of 1%.
- Consequently, the write-back to book value (shareholders' funds)came up to RM859mil or RM0.24/share, above our expected RM700mil. This enhancedbook value by 5.8%. This essentially means that part of PBB's previous accumulatedconservative loan loss provisioning (which in our view is arbitrary, and notrequired given its excellent asset quality) is now reversed toshareholders.
- There was no requirement to classify the amount written backinto a new regulatory reserve account (which we had expected to be classifiedas Tier 2 capital), under the shareholders' funds. Instead, the entirewrite-back is allowed to be posted to retained earnings, and therefore to Tier1 capital and core equity capital.
- PBB said the write-back has enhanced its Core Equity Ratioby 0.5%. On a QoQ basis, core Equity Ratio rose to 7.8% in March 2012, from7.5% in Dec 2011. The boost to core equity ratio is way above our expectation,as we had expected the write-back to be classified as Tier 2 capital.
- More importantly, we can confirm that there is no restrictionin the amount written back into retained earnings in the sense that this is distributableas dividend in future. This affirms our view that dividend should remain firmlyon an upward trend. We are projectingdividend to rise by 10% YoY for FY12F, 13%FY13F, and 13% for FY14F.
- We believe rerating catalysts from here onwards are :- (a)better-than-expected top line growth for both loans and non-interest income;(b) steady rise in absolute dividend; (c) confirmation of benign impaired loansand credit costs.
Source: AmeSecurites
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