Period  3Q14 / 9M14

Actual vs. Expectations 3Q14 net profit of RM1.2b brought 9M14 net profit to RM3.3b.

 This met expectations; accounting for 76% and 75% of our full-year estimate and street numbers, respectively.

Dividends  As expected, no dividend was declared since our last results note (3Q13: nil).

 Nonetheless, we expect a second and final dividend to be declared in the forthcoming quarter with a payout of c.28.0  sen.

Key Results Highlights YoY, 9M14 net profit advanced 7.4% due in part to: (i) a decent increase in net interest income (NII) to RM4.4b (+5.3%) on loan book expansion, despite net interest margin (NIM) retreating to 2.26% (-11bps), and (ii) a commendable growth in non-interest income (NOII) (+7.8%). Islamic banking income, on the other hand, slipped 1.2%. The overall result was a 5.1% increment in total income to RM6.4b.

 Growth at the net profit level accelerated mainly on: (i) a decline in allowance for loan impairment to RM46.6m (-24.8%), and (ii) a slightly lower effective tax rate of 22.4% (-20bps). As for operating expenses, cost-to-income (CI) ratio was held steady at 30.7%.

 Gross loan-to-deposit (LD) ratio was up 1.3ppts to 88.5% (industry: 81.8%), with gross loans growth of 10.2% (industry: +8.6%) outpacing that of deposits, which expanded 8.5% (industry: +5.6%). The growth in loan was pretty much meeting management’s guidance of 10%-11%. Main drivers of loans growth were the purchase of residential properties (+12.7%), and commercial properties (+15.6%). Meanwhile, current and savings account deposits grew in tandem with total deposits (+8.5%) and hence, continued to make up 25% of the mix.

 Asset quality continued to improve with gross impaired loans (GIL) ratio dropping to 0.65% (-4bps). In line with this, annualised credit cost ratio was also lower at 8bps (-12bps). Meanwhile, loan impairment coverage (LIC) ratio remained >100% and came in mostly flat at 117% (-20bps) (industry: 104.8%).

 Total capital was also better at 15.8% (+3.0ppts) following the RM4.83b rights issue (RI) in Aug 2014 despite the transfer of RM1.25b in retained earnings to regulatory reserves.

 Following the RI, annualised return on equity (ROE) came in 2.1ppts lower at 19.8% on a bigger share base post-listing and quotation of 350.2m rights shares (9.0% of enlarged share base).

 QoQ, 3Q14 net profit advanced by double-digit (12.8%) as total income grew to RM2.2b (+7.1%) with NII, Islamic banking income and NOII all reporting gains. Growth in NII was a nice 9.1% as NIM rebounded 9bps to 2.29% and gross loans increased (+2.3%), while Islamic banking income and NOII increased by 6.1% and 1.3%, respectively. The higher NIM was probably the result of the increase in the overnight policy rate on 10 Jul 2014. However, the downwards trend in NIM is expected to resume as competition heats up, especially on the deposit taking front given the Group’s higher-than-industry LD ratio.

 Growth in 3Q14 net profit outpaced that of total income mainly on the back of: (i) lower CI ratio of 28.9% (-2.9ppts) as personnel cost fell back (-4.3%), and (ii) lower allowance for loan impairment of RM46.6m (-27.9%).

 All-in-all, despite the tougher operating environment, the set of 3Q14/9M14 results is testament that PBBANK continues to be one of the best managed banks in town.

Outlook  Judging from the good loans growth momentum seen up to 9M14, FY14 loans growth will very likely meet management’s guidance of 10%-11%.

 Expect, also, for some attention to be directed towards growing non-interest income and adding higher yielding assets to the Group’s portfolio, e.g. selective corporate loans, as further compression is expected in NIM (say another c.6bps over the next two years).

 Market share in core business segments, i.e. retail, including SME, and hire purchase, should be maintained at the very least.

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

 Having said that, the operating environment is expected to get more challenging in light of a possible second rate hike. Higher interest in a 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. Although we also expect the Group to continue having tight credit control and hence solid quality asset, 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 PBK was ranging from 45bps to 60bps.

Change to Forecasts  No changes to our FY14 and FY15 earnings estimates of RM4,268.1m and RM4,719.6m respectively.

Rating Upgrade to OUTPERFORM

 The broad market sell-down has presented investors with a good buying opportunity. At the target price (TP) of RM20.00, PBBANK offers a total potential upside of 10.4%.

Valuation  Target Price (TP) retained at RM20.00, based on an unchanged target PBV of 3.15x (historical 3-year average) and PER of c.16x (+1SD above historical 3-year mean).

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

 Higher credit cost arising from faster-than-expected deterioration in asset quality or lower disposable income.

Source: Kenanga