Period  1Q14

Actual vs. Expectations The reported 1Q14 net profit of RM1.02b (+5.0% YoY) accounted for 23.4.7% of our full-year estimate of RM4.31b and 22.5% of consensus’ RM4.54b. Coupled with the seasonally weaker 1H, we deem the results as within expectations.

Dividends  No dividend was declared as expected.

Key Result Highlights Loan: Loan growth of 11.3% YoY (vs. last year’s growth of 11.8%) continued to be supported by the Group’s retail segment. This loans growth is within our low-teen expectations and management guidance of 10%-11% but was ahead of higher than the industry loan growth of 10.7% as at end-Feb14. The growth was mainly driven by strong SME loans growth of 20.7%, which accounted for 21.8% of total loans and was in line with the individual loans growth of 11.4%, which accounted for 63.7% of the loans book. Segmented in terms of economic purpose, the growth was driven by housing (+14.8% YoY), commercial property (+15.1%) and construction (+15.2%) as well as for working capital (+14.4%).

 Deposits: Total customers deposit grew 11.5% YoY, higher than the banking industry YoY growth of 7.0% (as at end-Feb14). Again, such growth is pretty much within our expectations. As a result, LDR remains fairly at 87.5% vs. 88.2% and 87.7% as at end-Dec13 and end-Mar13, respectively. CASA-to-Total Deposits stood at 25.5% (vs. 4Q13: 21.5% & 1Q13: 25.2%), in line with the industry average of 26.7% as at end-Feb14.

 Interest Income: NIM continued to be under pressure. It dipped another 4bps QoQ and 8bps YoY. Consequently, net interest income grew at a slower rate of 3.9% YoY (and dipped 0.7% QoQ). In line with the lower NIM, Islamic Banking Income also declined 0.8% YoY (while it was flat at +0.8% QoQ).

 Non-interest income, which accounted for 22.0% of total income, mainly attributed to growing unit trust business and transactional banking services, grew 7.5% YoY and 2.7% QoQ.

 Highly cost efficient. While the operating expenses increased 3.8% YoY and 4.0% QoQ, the cost-to-income ratio (CIR), however, improved slightly from 31.9% in 1Q13 to 31.8% in 1Q14 despite slightly higher than 4Q13 of 30.6%. As such, CIR was ahead of the management’s target of <32%.

 While allowance for impairment on loans declined 6.1% QoQ, it increased marginally at 4.2% YoY. As a result, annualised credit cost only registered at 15bps as opposed to 17bps in 4Q13 and 16bps in 1Q13. Gross impaired loan ratio stood fairly stable at 0.66% (vs. 0.67% in 4Q13 and 0.68% in 1Q13, in contrast to industry average of 1.3% as at end-Feb14 and within management guidance of <1%. Loan loss reserve also remained prudent at 119.1% vis-àvis industry average of 104.5% (as at end-Feb14) despite declining from 126.0% in 4Q12 (or 123.9% in 1Q13).

 ROE stood at 19.9% which was almost in line with its 2014 KPI of >20%.

 Capital adequacy: The Group’s Tier 1 Capital Ratio and Total Capital Ratio registered at 10.1% and 13.3%, respectively, as at end-Mar14. While the Total Capital Ratio was lower than industry average of 14.4% as at end-Feb14, it was still ahead of management guidance of >12% and way surpassed the requirements under the Basel III regime of 10.5% by Jan 15.

Outlook  Despite keen competition and tough operating environment, we believe the Group will continue to grow from strength to strength.

 It is believed that the Group will still focus on its core business segments, i.e. retail, including SME. While the management guided for 10%-11% growth in loans, we would not be surprised if growth could probably hit 11%-12% judging from the underlying growth momentum.

 NIM is expected to continue to be under pressure, say c.6bps for the next two financial years, as this could be a structural issue/trend. Besides, we have yet to factor in any potential interest hike this year as we view the underlying inflation as cost-push in nature. Higher interest in cost-push inflationary environment could translate into lower affordability and asset quality hence higher credit cost despite a potential reversal/higher NIM under a rate hike scenario.

 In terms of operating cost, it is believed that the Group should be able to maintain such low CIR due to excellent cost control and operating efficiency. We have factored in CIR of ~30% for the next 2 years.

 While we also expect the Group to continue to have tight credit control, hence solid quality, the concerns of heightening credit cost remains due to higher living cost that would potentially impact borrowers’ affordability. In our forecast, we have imputed in <20bps in credit cost. Note that before FY12, credit cost of PBBANK was ranging from 45bps to 60bps.

 However, it may not be able to achieve its >20% ROE target as per our revised ROE estimates of 19.8% and 19.6% for FY14E and FY15E respectively. This could probably translate into a lower trading PBV.

Change to Forecasts  We have done some minor revisions due to our house-keeping and fine-tuning of our assumptions. Our FY14E and FY15E net profit estimates are refined to RM4,268.1m and RM4,719.6m from RM4,309.0m and RM4,522.3m previously, implying revisions of -0.9% and 4.4%, respectively.

 For the full-year, we still expect PBBANK to dish out c.45% of its net profit as dividend, which translate into 54.0 sen/share in FY14E and 60.0 sen/share in FY15E.

Rating  Upgrade to OUTPERFORM from MARKET PERFORM as per our rating definition. The stock offers a potential total return of 11.1% with a higher Target Price revision and 2.7% dividend  yield.

Valuation  The stock was traded at 3.3x FY13 PBV and 16.7x FY13 PER as at end-Dec13. These valuations represent +1SD above the 3-year average price multiple bands.

 However, due to the unfavourable trends such as (i) moderating in loans growth, (ii) narrower interest margin, (iii) higher credit cost, and (iv) lower estimated ROE, we do not rule out a potential de-rating. Nonetheless, due to its consistent performance, i.e. lower volatility in earnings track records, prudent management and cost efficiency; we believe any de-rating should be mild.

 We set our Target PBV at 3.15x (which is the 3-year average) and Target PER at c.16x (which is the +1SD above 3-year mean).

 Pegging these targets to our FY15E BPS and EPS estimates of RM7.20 and RM1.34, we derive a blended fair valuation of RM21.90. At this average Target price, it implies a FY15E PBV of 3.0x and a FY15 PER of 16.4x.

 This valuation is 6% higher than our previous estimate. Note that apart from the changes in estimates, our previous valuation is based on FY14E numbers.

Risks to Our Call  Slower-than-expected household lending growth.

Source: Kenanga