Period

3Q15/9M15

Actual vs. Expectations

9M15 net profit of RM3.57b (+9.3) came in line with our expectation and consensus estimate, making up 75% of both full-year forecasts due to better-than-expected non-interest income and loan growth.

Dividends

As expected, no dividends were declared.

Key Results Highlights

9M15 vs. 9M14, YoY

The improved earnings (+9.3% vs. 9M14:+7.4%) was mainly driven by a spectacular non-interest income (NOII) growth of ~21% (vs. +8% in 9M14).

Non-interest income was robust, thanks to the jump in: (i) unit trust income (+8.2%), (ii) fee income (+18.3%), (iii) forex gain (+69%), and (iv) investment income (+16%).

On an annualized basis, net interest margin (NIM) fell 13bpts due to stiff price-based competition in the deposits market. (vs. our estimation of 14bpts)

Loans and deposits grew at 13% and 10%, respectively (as opposed to 10% and 8% respectively in 9M14). The registered loan growth was better than the industry average of 8.2%. (Our forecasted loan and deposit growth was at 10% and 9% respectively)

This led to loan-to-deposit ratio (LDR) extending by 2ppts to 90%. Current account & savings account deposits (CASA) rose 8%, making up 25% of total deposit base (in line with 25% in 9M14).

Cost-to-income ratio (CIR) was flattish at 31% (in line with our forecast) as opex and total income grew in tandem (+10%). Industry average CIR was at 45%.

Asset quality was mixed as gross impaired loans (GIL) ratio fell 10bpts but credit costs advanced 8bbpts. Furthermore, loan loss coverage (LLC) stayed at 131%, above the industry average of 98%. (We assumed LLC at 118%)

ROE dipped 3ppts to 16%, due to an enlarged shareholders’ equity. (vs. our forecast of 2ppts)

CET1, Tier 1 and total capital ratios dropped by 20- 100bpts attributed to dividend payout and higher goodwill.

Change to Forecasts

Since PBBANK’s 9M15 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 were never inexpensive. That said, it will continue to fetch a premium vs. its peers given current market uncertainties.

Valuation

We maintained our TP of RM20.00. This is based on a blended 2.5x FY16E P/B and 15.0x FY16E 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. 3Q15 vs. 2Q15, QoQ

Net profit ticked up 0.4% despite a 7% increase in total income due to higher impairment allowances of 93%.

NIM expanded by 6bpts due to high costs deposits winding down in the 1H15.

Loans accelerated (+3.6%) a tad quicker than deposits (+0.4%) causing LDR to increase 3ppts to 90%.

CIR inched down by 1ppts to 30% given that total income and opex advance higher at 7% and 3%, respectively.

Asset quality was stable as GIL ratio was flattish at 0.5% while 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 is showing signs of weakening given external and internal headwinds prevailing with credit costs heading north. NIM pressure is likely to persist on the back of stiff price-based competition for loans and deposits.

We maintained our assumptions for FY15/16E: (i) ROE to come in above 16% for both FY15/16 (ii) Total loans growth of 9-10% for FY15/16 (iii) Total deposits growth of 9-10% for FY15/16 (iv) NIM at 2.14%/2.08% for FY15/16, (v) Credit charge ratio of between 12bpts - 15bpts and (vi) CIR of between 30% to 32%

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 - 23 Oct 2015