Period

2Q15/1H15

Actual vs. Expectations

1H15 net profit of RM2.4bn (+14% YoY) was in line with our and street estimates, making up 50% of both fullyear forecasts.

Dividends

As expected, an interim DPS of 24.0 sen was declared (1H14: 23.0 sen), in line with its historical trend. Assuming a payout ratio of 44%, we expect PBBANK to declare a final DPS of 30.0 sen in 4Q15 (FY14: 44%).

Key Results Highlights

1H15 vs. 1H14, YoY

The spike in earnings (+14%) came mainly from: (i) higher net interest income (+10%), (ii) stronger noninterest income (+15%) and (iii) lower provision for bad loans (-9%).

Non-interest income (+15%) was robust, thanks to the jump in: (i) unit trust income (+9%), (ii) fee income (+19%), (iii) forex gain (+21%), and (iv) investment income (+22%).

Net interest margin (NIM) fell 11bpts due to stiff pricebased competition in the market, especially for retail deposits.

Loans and deposits both grew 12%. In turn, loan-todeposit ratio (LDR) was relatively unchanged at 88%. Note that its loans growth was ahead of both our estimate and management target of 10%.

Current account & savings account deposits (CASA) rose 7%, making up 24% of total deposit base (1H14: 25%).

Cost-to-income ratio (CIR) declined 70bpts to 31% as opex grew at a slower pace (+8%) vis-à-vis total income (+10%).

Asset quality improved as gross impaired loans (GIL) and credit charge ratio fell 20bpts and 2bpts, respectively. Furthermore, loan loss coverage (LLC) stayed above 100%.

ROE dipped 3ppts to 17%, in line with our and management expectations.

CET1, Tier 1 and total capital ratios expanded 1-2ppts. This can be attributed to the capital raising exercise from last year. 2Q15 vs. 1Q15, QoQ

Net profit ticked up 2% given the same reasons highlighted above: (i) net interest income rose 2%, (ii) non-interest income increased 3% while (iii) allowance for impaired loans fell 20%.

NIM narrowed 4bpts due to rising cost of funds as competition in the deposit taking space remains heated.

Loans accelerated (+6%) a tad quicker than deposits (+4%) causing LDR to increase 2ppts to 88%.

CIR was also flat at 31% given that opex and total income inched up by 2-3%.

Asset quality gained traction as: (i) GIL ratio contracted 10bpts while (ii) LLC stayed above 100%.

Outlook

Leading indicators for loans growth remains weak and we are only expecting system loans to expand by 7-8% YoY this year (vs. 2014: +9.3% YoY). Furthermore, the industry’s relatively high LDR of over 80% makes bank lending more difficult than usual. As for asset quality, it should remain stable in 2015 as banks continue to seek out new, creditworthy customers. However, we believe that there will be an up-cycle in credit cost given that most of the bad legacy business loans have already been restructured or recovered last year. On the other hand, NIM pressure is likely to persist on the back of stiff price-based competition for loans and deposits.

Management kept its FY15 guidance: (i) ROE to come in above 16% (1H15: 17%, Kenanga: 17%), (ii) Total loans growth of 9-10% (1H15: 12%, Kenanga: 10%), (iii) Total deposits growth of 9-10% (1H15: 12%, Kenanga: 9%), (iv) NIM to +/- 12bpts (1H15: -11bpts, Kenanga: -14bpts), (v) Credit charge ratio of below 20bpts (1H15: 11bpts, Kenanga: 12bpts), and (vi) CIR below 32% (1H15: 31%, Kenanga: 31%).

Change to Forecasts

Since PBBANK’s 1H15 results is in line with expectations, we make no changes to our FY15E/FY16E earnings of RM4,784m/RM4,997m.

Rating

Maintain MARKET PERFORM

Despite PBBANK being a solid entity with strong fundamentals (superior in terms of cost controls and asset quality compared to other banking stocks under our coverage), its valuations was never inexpensive. That said, it will continue to fetch a premium vs. its peers given current market uncertainties.

Valuation

We nudged up PBBANK’s TP to RM20.00 (from RM19.30) as we roll over our valuation to FY16. This is based on a blended 2.5x FY16 P/B and 15.0x FY16 P/E (previously 2.6x FY15 P/B and 15.4x FY15 P/E). The lower P/B and P/E multiples are to reflect slower growth and weaker ROE generation moving forward.

Risks to Our Call

Steeper margin squeeze from tighter lending rules and stronger-than-expected competition.

Slower-than-expected loans and deposits growth.

Higher-than-expected rise in credit charge as result of a potential up-cycle in non-performing loan (NPL).

Source: Kenanga Research - 31 Jul 2015