PBBANK's 2Q12 earnings are expected to be marginally weaker on a QoQ basis, largely driven by the normalisation of its credit cost. However, the overall 1H12 earnings will still likely marched the consensus and our expectations. As such, there is unlikely to be any changes in ours and the consensus estimates after the results. We reiterate our OUTPERFORM rating on Public Bank ('PBBANK') with an unchanged target price ('TP') of RM15.60 based on 2.9x FY13 P/BV, implying 13.0x PER of FY13E earnings. In addition, we think that it is the right time now to turn more positive on the bank due to the rising investors' preference for defensive stocks. This trend is set to be a major rerating catalyst for PBBANK going forward in 2H12 given the expectation of rising dividends for the bank, a better free cash flow generation, its consistent ROE and also its high earnings visibility. The share price in fact has performed well, up +4.4% since June 2012.

PBBANK is due to report its 2Q12 results on 23 July. We are forecasting a profit after tax of RM850m, 3.3% lower than 1Q12's RM877m. This is because we see potential normalisation in its credit cost to 32bps (on annualized basis) vs. 1Q12's 7bps and partly offset by a lower operating cost. As such, 1H12 PAT of RM1,725m should be in line with ours and the street's estimates.

We expect dividend payout to stay the same. We expect PBBANK will continue to maintain its full year dividend payout of 50% or at 75 sen per share despite rumours that there could be a disappointing interim dividend payout in 2Q12. We are forecasting an interim DPS of 20 sen for 1H12, which would be lower by 20% YoY. That said, as mentioned above, we are still expecting the full year dividend payout to remain unchanged at 50% (at gross DPS of 75 sen), which will offer a 4% net yield. The group is likely to continue maintaining its lean balance sheet structure and its overall strategic direction is also likely to remain unchanged. Our base case is that there will not be further capital requirement under Basel III. Core Tier 1 ratio was 7.8% in Mar 12, which will be sufficient for organic growth in our view.

Stable NIM in 2Q12. In 1Q12, NIM fell by 10bps QoQ to 2.50% as funding costs surged with a substantial cut in asset yield due to price competition. In 2Q12, we believe both the funding cost and asset yield have stabilised and thus we are expecting a flattish NIM for the quarter t 2.49%, -1bps QoQ. Net interest income is expected to rise to M1,270m (-0.1% QoQ), supported by a 3.0% QoQ loan growth. Together with the flat non-interest income, we expect earnings to fall 3.3% QoQ.

Paying for protection. PBBANK has performed well, rising 4.4% since June 2012, which we believe reflects its defensive quality supported by a solid capital and dividend payout. We continue to like PBBANK and are optimistic about its near-term relative performance as the stock is likely to play catch-up on the defensive theme.

Rating and TP maintained. Our OUTPERFORM rating is maintained as the current share price implies a 13% total upside (with a 4% net div yield) as measured against our TP of RM15.60. At this TP, the P/BV valuation would be at 2.9x and the PER at 13.0x FY13 earnings.

Source: Kenanga