No surprises with 12M16 core earnings of RM5,207m which was within expectations, accounting for 105%/104% of both ours and consensus estimates. Fullyear dividend declared for the year of 58.0 sen/share (in line). With management’s guidance for FY17 within our conservative estimates, we maintain our TP of RM20.05 and MARKET PERFORM call.

12M16 core net profit (CNP) improved by 2.9%, underpinned by better fund-based income and better-than-expected NIMs. Top-line improved by 4.3% YoY driven by improvement in Net Interest Income (NII) at +2.5% YoY, Islamic Banking income (+13.6% YoY) but mitigated by fall in Non-Interest Income (NOII) by 10.5% YoY. Better NII was attributed in better NIMs (improved by 7bps vs. our estimate of a 5bps compression). Loans were slower at +7.5% YoY (vs. our forecast of +9%, management’s guidance of 8-9% and industry’s +5.3%). Deposits growth of 2.9% was below management’s target of 5-6% (vs. our forecast of +7% and industry’s +1.5%). Weaker deposits growth led to loan-to-deposit ratio (LDR) rising by 4ppts to 94.8%. Cost to Income ratio (CIR) was 2ppts higher at 32.3% (vs. industry’s 48.9%) attributed to higher operational costs. Asset quality continued to be stable at a flattish 0.5% with credit costs rising by only 2bps to 0.07% (vs. a 15bps guidance). Despite an increase in earnings, ROE at 15.5% was lower than for FY15 (16.6%) but above management’s target of 15%.

Strong QoQ. On a quarterly basis, CNP was stronger at 19.8% QoQ as top-line improved by 3.8% aided by RM37.1m writeback. LDR surged by 4ppts to 88% as loans (+2.5% QoQ) outpaced deposits (- 2.5%). Asset quality was stable as GIL stayed flattish at 0.5% with a credit recovery of 5bps.

Caution ahead. Management painted a subdued outlook for 2017 with the stable economy and positive monetary environment supporting the banking sector albeit at a moderate pace. The focus will still be on HPs, SME financing, and residential & commercial properties going forward. Its loans/deposits target for 2017 are 6- 7%/5-6% (lower than 2016 targets) with LDR of ~ 95%. Surprisingly, management guided for a 5bps NIMs compression as it focus on pricier cost of funds with loan pricing expected to remain stable. We believed the focus on pricier funding is to have higher long-term funding as banks prepare for MFRS9. As for asset quality, management is maintaining its current GIL ratio and expects credit costs to reach 15bps for 2017. Still no concrete guidance on how loan loss provisions will be for 2018, but management expects minimal impact on its Capital Adequacy Ratio due to its high Loan Loss Coverage of >100%. No change to our FY17 NP forecast (RM5,287m) as management guidance is in line with our estimates. We introduced our FY18 forecasts where we expect earnings to be challenging due to further NIMs compression and higher credit costs with the implementation of MFRS9.

No change in TP and MARKET PERFORM call. We maintain our TP of RM20.05 based on a blended 2.3x FY17E P/B and 14.3x FY17E P/E. Despite excellent operating efficiency and stable asset quality (with CIR of 32% and credit costs under 10bps, PBANK is still subject to the challenging economic environment. With a demanding valuation at 2.4x P/B (the highest in the industry) we reiterate our MARKET PERFORM call

Source: Kenanga Research - 3 Feb 2017