Period  4Q14 / FY14

Actual vs. Expectations

 4Q14 net profit of RM1.3b brought FY14 net profit to RM4.5b.

 This ran ahead of expectations, accounting for 107/103% of our/consensus full-year estimates.

 The better-than-expected performance was due to stronger growth in non-interest income (NOII) and lower credit cost. Dividends  A second interim single-tier dividend of 31 sen/share was declared in respect of FY14 (FY13: 22 sen/share).  This brings FY14 dividend to 54 sen/share, representing a pay-out ratio of 43.7% (above our 40.5% assumption).  Shares will trade ex-dividend on 18 Feb 2015 and payment will be made on 5 Mar 2015.

Key Results Highlights  YoY, FY14 closed strongly with full-year net profit advancing 11.2%. The good showing was partly attributable to: (i) a decent increase in net interest income (NII) to RM5.9b (+6.5%), despite a retracement in the net interest margin (NIM) to 2.24% (-11bps), and (ii) a commendable +9.2% gain in non-interest income (NOII). Islamic banking income (IBI), on the other hand, slipped 0.7%. The overall net result was a 6.3% increment in total income to RM8.7b.

 Growth at the net profit level accelerated as impairment loan allowance fell 26.5% to RM258.2m given a 5bps decline in credit charge ratio. Meanwhile, cost-to-income (CI) ratio improved marginally to 30.0% (-0.6ppts).

 Gross loan-deposit (LD) ratio remained mostly intact, inching up by only a slight 0.5ppts to 88.6% (industry: 81.2%), as gross loans growth of 10.8% (industry: +8.7%) outpaced that of deposits, which expanded by 10.2% (industry: +7.6%). The growth in loans met management’s 10-11% target. Main drivers of loans growth were the purchase of residential properties (+12%), commercial properties (+14%), working capital purposes (+16%), and the purchase of transport vehicles (+7%). There was, however, a slight 1ppts drop to 25% in the proportion of current and savings account deposits to total deposits, which is expected.

 Asset quality continued to improve with gross impaired loans (GIL) ratio dropping to 0.61% (-6bps). In line with this, annualised credit cost ratio was also lower at 10bps (- 6bps). Meanwhile, coverage remained sufficient with loan loss coverage (LLC) ratio remaining >100%, at a higher 122% (+3.9ppts) (industry: 106%).

 Following the rights issue in Aug 2014, annualised return on equity (ROE) came in 2.4ppts lower at 18.3% on a bigger share base post-listing and quotation of 350.2m rights shares (9.0% of enlarged share base).

 QoQ, 4Q14 net profit advanced 5.2% due in part to growth reported in NOII (+4.4%). NII, contrariwise, stayed mostly flat (+0.2%) as NIM dropped 9bps to 2.20%, while IBI fell 4.7%. Hence, total income only managed a small 0.7% incline to RM2.3b.  Growth in 4Q14 net profit outpaced that of total income mainly given a lower effective tax rate of 19.2% (-3.4ppts). The CI ratio, on the other hand, was largely unchanged at 28.1% (-0.8ppts).

 All-in, PBBANK delivered as promised, with all FY14 targets achieved.

Outlook  FY15 targets have been released for net ROE (>16% vs. FY14 target: >18%), total capital ratio (>13% vs. FY14 target: >12%), GIL ratio (<1% vs. FY14 target: <1%), CI ratio (<32% vs. FY14 target: <32%), loans growth (9-10% vs. FY14 target: 10-11%) and deposits growth (9-10% vs. FY14 target: 10-11%).

 While some targets have been maintained, others have been scaled back, reflecting a more cautious outlook. Having said that, net profit growth should still register in the mid-to-upper single digit. Our FY15E assumes growth to be 5-6%.

 The Group is expected to maintain its leadership in the residential property (and passenger vehicle) segment. However, loan approvals could be more selective in favour of mass market affordable housing.

 Meanwhile, increased focus could be directed towards winning over mid-market SMEs and micro enterprises, as well as growing the Group’s fee-based income (e.g. unit trust, bancassurance, banking fees). The latter could cause an increase in the CI ratio and we have imputed c.60bps increase.

 NIM compression is expected to persist due to the continuing rebalancing of the Group’s loan portfolio and higher cost of funds as banks rush to shore up retail deposits in view of lower excess liquidity and to ensure sufficient liquidity coverage. A 10bps compression in NIM has been imputed into our FY15 forecast.

 Dividend payout, on the other hand, should be maintained, and we are assuming a full-year payout of 43-44%.

Change to Forecasts  In light of PBBANK’s good full year results, we have tweaked our FY15E earnings upwards by 5%. Essentially, we have imputed stronger growth in NOII (+9%) given management’s intention to grow its fee-based income. We have also reduced our credit cost assumption to 12bps (-7bps) on anticipation that credit controls will remain tight and credit selection process, stringent. Additionally, our assumed borrowing cost has been bumped up by 17bps to better reflect the stiff competition for deposits and overall higher cost of funds.

 FY16E numbers have also been introduced.

Rating Downgrade to MARKET PERFORM

Valuation  In view of our higher FY15 estimates, we nudge upwards our TP to RM19.30 (from RM18.90) based on a target price-book ratio of 2.6x (pegged to a FY15 ROE of 16.7%) and target price-earnings ratio of 15.4x (historical 3- year mean).

 While PBBANK remains a solid performer and defensive stock, upside potential may be capped in the near-term as the outlook for banks has turned cautious, with PBBANK unveiling less aggressive FY15 targets. Estimated dividend yield is also lower than industry average at 2.9%. As such, potential upside could be limited (<10% based on our TP and dividend estimate of 54 sen/share).

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