Period

1Q15/3M15

Actual vs. Expectations

1Q15 net profit of RM1.17b met expectations, accounting for 24.5%/24.8% of our/consensus full-year estimates.

Dividends

As expected, no dividend was declared.

Key Results Highlights

YoY, the financial year began strongly with 1Q15 net profit rising by 15.2%. The good showing was partly attributable to: (i) a commendable increment in net interest income (NII) to RM1.53b (+9.4%), despite a retracement in the net interest margin (NIM) to 2.15% (-13bps), and (ii) a praiseworthy 15.7% gain in non-interest income (NOII) to RM526.6m on higher contribution from the Group’s unit trust business, bancassurance, banking services and investment income. Islamic banking income (IBI), on the other hand, continued to disappoint, slipping 0.6% to RM204.4m. The overall net result was a solid 9.8% increment in total income to RM2.27b.

Further growth was spurred by a slightly improved costincome (CI) ratio to 31.0% (-76bps), (iv) a decline in loan impairment allowance to RM75.7m (-10.7%) and a fall in the effective tax rate to 20.4% (-2.2ppts).

It should be noted, however, that the growth only translated into an earnings per share (EPS) gain of 4.5% given the enlarged share base post-rights issue (completed Aug 2014), which is still comfortable. That said, annualised return on equity (ROE) was lower during the period (-3.4ppts) at 17.1%.

Gross loan-deposit (LD) ratio increase 1.1ppts to 88.7% (industry-Feb: 81.8%), as gross loans growth of 11.7% (industry-Feb: +8.8) outpaced that of deposits, which expanded by 10.2% (industry-Feb: +8.3%). There was also some reduction in the proportion of current and savings account deposits to total deposits to 25.0% (-53bps) on the continued competition for deposits. On an annualised basis, the growth in gross loans and deposits outperformed management’s 9-10% target, advancing by a higher +13.1% and 12.8%, respectively (we have imputed growths of 9.7% and 9.2% respectively). Main drivers of loans growth continued to be the purchase of landed properties (+4%), the purchase of transport vehicles (+3%), and financing for working capital purposes (+4%).

Asset quality further improved with gross impaired loans (GIL) ratio dropping to 0.56% (-10bps; industry-Feb: 1.7%). In line with this, annualised credit cost ratio marginally decreased to 15bps (-1bps). Meanwhile, coverage was higher to 128.1% (+9.0ppt) and likely remained above system’s loan loss coverage end-Mar (industry-Feb: 97.9%).

QoQ, 1Q15 net profit fell 6.6% due in part to: (i) a slip in NII (- 1.3%) as NIM loss 5bps, and (ii) a marginally lower IBI (- 0.7%). NOII, on the contrary, continued to grow (+4.9%). As a result, total income managed an almost flat 0.1% inclination to RM2.27b.

Nevertheless, a retracement was recorded in the Group’s bottom-line mainly given a large 2.9ppts increment in the CI ratio attributable to a 9% increment in personnel costs to RM321.5m.

Outlook

Looking at the scorecard, 1Q15 saw net ROE (17.1% vs. target: >16%), total capital ratio (15.2% vs. target: >13%), GIL ratio (0.56% vs. target: <1%), and CI ratio (31.0% vs. target: <32%) meeting FY15 targets. Loans growth (13.1% vs. target: 9-10%) and deposits growth (12.8% vs. target: 9- 10%), on the other hand, had an excellent head start as both measures had exceeded the targets set.

Leadership in the residential property (Feb: 19.3% market share), commercial property (Feb: 33.8% market share), and hire purchase (Feb: 28.4% market share) segments have been and should continue to be maintained. However, loan approvals for the residential property sector

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.

Contribution from overseas operations has been growing steadily, making up a higher 8.8% of pre-tax profit (+1.5ppts) at 31 Mar 2015. The forthcoming completion of the acquisition of the remaining 50% equity interest in VID Public Bank in Vietnam will provide continued growth in this space.

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

Change to Forecasts

No changes to our FY15/16 earnings forecast or RM4.78b/RM5.00b.

Rating

Maintain MARKET PERFORM

The banking sector remains challenging and PBBANK, despite being one of the most resilient banks domestically, is likely to also feel the pinch. Coupled with the Group’s rich valuations and lower-than-MGS (10yrs at 3.88%) dividend yield of 2.8%, we reiterate MARKET PERFORM on the counter.

Valuation

TP unchanged at RM19.30 based on a blended 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).

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 Research - 21 Apr 2015