Public Bank's 9MFY12 results were largely in line with consensus and our full-year estimates. The group remains a solid investment in uncertain times given its superior  asset  quality.  However,  it  is  facing  key  challenges  in  the  form  of  a dampened growth outlook and margin compression. A dividend upside surprise isunlikely to materialize in the immediate to medium term. Given the limited upside, slowing  consumer  lending  growth  as  well  as  NIMs  pressure,  we  are  maintaining our  NEUTRAL  call  on  the  stock.  Rolling  forward  our  valuations  to  FY13  book values, we raise our FV to RM15.70 from RM14.40 (2.82x FY13PBV, 22% ROE, 9.5% COE, growth rate: 3%). 
 
Within  estimates.  Public Bank's 9MFY12 annualized earnings were in line with both consensus and our estimates, with the 9MFY12 numbers representing 74.8% of our full-year earnings forecasts.

Lacklustre  growth.  The group's 9MFY12 earnings grew by a subdued 3.8% y-o-y  as persistent net interest margin (NIM) pressure and rising overhead costs crimped overall growth.  Pre-provision  operating  profit  ticked  up  by a  very marginal 3.4%  y-o-y  with  key drags attributable to (i) 3Q12 NIMs compressing by 20bps y-o-y to 3.1% but remaining stable q-o-q, ii) higher overhead expenses (+8.0% y-o-y ) mainly due to personnel costs, and (iii) a lacklustre performance from its stockbroking and investment banking divisions. The 3.6% PBT growth was largely supported by a 11.6% drop in loans loss provision.

Group  loans  on  track  to  hit  target.  The group's  9MFY12  gross  loans  rose  at  an annualized pace  of  11.3%, partially  dragged  down  by  a  5.0%  contraction  in  loans  from its  Hong  Kong  operations,  which  slowed  domestic  annualized  loans  growth  to  12.8%. Management has targeted overall loans growth of 10% to 11%. Hire purchase was the key drag in its domestic loans portfolio, with 8.6% y-o-y growth on an annualized basis, while  residential  and  non-residential  property  loans  growth  remained  robust  at  16.9% and  22.2%  respectively  vs  17.6%  and  16.5%  in  2011.  The  loan-to-deposit  ratio  was steady at 86.8%, largely sustained by stronger wholesale deposit growth, which grew at an annualized 16.2%. Meanwhile, core deposits grew at a slightly slower annualized rate of 12.3% vs the group's loans growth of 13.3%.

Superior  overall  asset  quality  sustained.  Overall  gross  impaired  loans  dipped  0.5%  q-o-q,  with  all  key geographical operations registering an improvement: Malaysia: -0.3% q-o-q, Hong Kong and China: -2.7% q-o-q and Cambodia -1.1% q-o-q. As a result, the group's loans loss coverage ratio continued to go up post MFRS139 adoption to 124.5% from 117.1% in 1Q12, with a corresponding improvement in gross impaired loans ratio to 0.7% from 2Q12's 0.8%

Trimming  guidance  for  dividend  payout  ratio.  Given  the  need  to  conserve  capital  in  anticipation  of providing for Basel 3 counter-cyclical buffers amidst challenges in growth and persistent  margin pressure, the  group  is  moderating  its  dividend  payout  ratio  guidance  downwards  to  40%-50%  vs  the  original guidance of close to 50%. Assuming that the group maintained its FY11 absolute net DPS at 48 sen, this would translate into a net dividend payout ratio of 44% of FY12's net yield, or just 3.3% of its current share price level.

Source: OSK