PBBANK's 3Q12 earnings are expected  to  be  steady  on  a  QoQ basis, driven by a likely mid-to-low single-digit QoQ revenue growth. A particularly difficult margin environment is likely to offset the benefits of our anticipated 3% QoQ (or +13% YoY) forecast loan growth and 2% QoQ growth in its non-interest income. The overall 9M12 earnings will likely come in within the consensus and our expectations. We have made a modest adjustment on our dividend payout assumption as the group continues to preserve capital for the upcoming Basel 3 requirements.  We are reiterating our OUTPERFORM rating on Public Bank ('PBBANK') with an unchanged target price ('TP') of RM15.60 based on 2.8x FY13 P/BV, implying a PER of 13.0x on its FY13E earnings. 

PBBANK is due to report its 3Q12 results mid of this week.  PBBANK will be the first bank to report its results, which should show a mid-to-low single-digit QoQ revenue growth in the range of 2%-5%. A particularly difficult margin environment is likely to offset the benefits of our anticipated 3% QoQ (or +13% YoY) forecast loan growth and 2% QoQ growth in its non-interest income. We are expecting a lower NIM for the quarter at 2.45%, -5bps QoQ, as price competition has gotten more intense during the quarter on both the asset as well as liabilities sides. Nonetheless, we still expect the banking group to register a profit after tax of RM963m in 3Q12, representing 1% higher than 2Q12's RM953m. This is because we see a continuous normalisation in the bank's credit cost to 18bps (on an annualised basis) vs. 1H12's 12bps and management's  guidance of <20bps.  However, this would be partly offset by a lower operating cost with a 30% cost-toincome ratio. As such, the 9M12 PAT (expected at RM2,854m) should be in line with ours and the street's estimates.  

Modest adjustment on dividend assumptions.  We expect PBBANK will continue to preserve more equity to prepare for the upcoming Basel 3 requirements. As such, we have made a modest adjustment to our FY12-13 dividend estimates. We have lowered our dividend payout estimates to 48% (from 50% previously) translating to a full-year  net DPS of 50 sen per share (1H12: 20 sen, single tier) for FY12, which would still be higher by 4% YoY. At  this revised dividend payout ratio, the stock is expected to offer net yield of 3.5%-4.8% for FY12-FY13.  The group is also likely to continue to maintain 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 for PBBANK and as such, is expecting no equity share placement for it over the immediate term like what MAYBANK did two weeks ago. According to management, its Core Tier 1 ratio is likely to remain at 8% by Dec 12, which will be sufficient for its organic growth in our view.

Rating and TP maintained.We believe PBBANK's defensive quality is supported by its 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 its defensive theme. Our OUTPERFORM rating is hence maintained as the current share price implies a 13% total upside (inclusive of 4.8% net div  yield)  to our TP of RM15.60. At our TP, its P/BV valuation would be at 2.8x and the PER at 13.0x FY13 earnings.

Source: Kenanga