As usual, no surprises with PBBANK’s 9M18 core earnings coming in within expectations accounting for 74%/73% of both our/market estimates. Despite the positive results, we cut our FY19E earnings estimates slightly to reflect our cautious outlook for loans growth. However, we are positive on its asset quality ahead and ascribed to a higher PB ratio, resulting in an unchanged TP of RM23.85. Reiterate MARKET PERFORM.

As expected, 9M18 core net profit (CNP) was in line at RM4.2b accounting for 73%/74% of consensus/our estimates. Consistent with the theme for 2018, earnings were supported by falling impairments allowances as topline was soft. No divided declared as expected.

Slower loans. YoY, 9M18 CNP of RM4.2b was supported by receding impairments (-24.8% YoY) as topline was soft (+2.2% YoY). Only an improved Islamic banking income (+6.4%) pushed topline as NII slowed by 570bps at +2.3% YoY with flattish NOII. The slower NII was dragged by slower loans by 10bps to +4.4% YoY (within guidance/expectations of 4-5%) and weakening NIM by 4bps to 2.14% (within guidance/expectations). Domestic loans growth of +4.4% was softer than the system at ~5%. Asset quality was consistent with GIL at 0.5% with a credit charge of 6bps (below guidance/expectations of 15/10bps). Cost-to-Income (CIR) ratio maintained its excellent position among peers at 33.0% (vs. guidance/expectation of 33-34%/32%) with industry CIR at 46.8%.

Sequentially weaker. QoQ, earnings fell by +0.9% despite marginal improvement in topline as impairment allowances jumped by +162% to RM48.9m. Improved topline can be seen from Islamic banking (+1.0%) and NOII (+4.2%) but dragged by marginal fall in NII (-0.1%). Loans slowed by 10bps to 1.2% with NIM falling by 3bps to 2.17%. Credit charge for the quarter jumped by 4bps, which is seasonal.

Still cautious. We maintained our moderate outlook ahead for FY18E and maintained our assumptions; (i) loans at 4-5% (with a downside bias), (ii) credit costs at 0.10% (iii) NIM compression of 4bps. For FY19, we feel household loans will be under pressure with the expected slowing economy thus we lower our loans growth expectations with a downside bias of 4-4.5% (from +4.6-5%). Despite expecting a moderate credit demand, we feel NIM compression will persists due to on-going deposits competition (with 9M18 LDR and CASA ratio at 93% and 26%, respectively); thus we revised our FY19E NIM with a 2bps compression (from 4bps enhancement).

Marginal adjustment to FY19E earnings. While we maintained our FY18E earnings, we reduce our FY19E earnings by 2% to RM6.03b on account of slower lower loans and compressing NIM.

No change to our TP of RM23.85 based on a blended PB/PER of 2.3x/15.0 FY19E (from 2.2x/15.0 previously). The higher PB is based on its updated 5-year average with a +0.5SD mean to reflect our optimism of stable credit costs enhancing earnings ahead. Maintain MARKET PERFORM.

Key risks to our earnings estimates are: (i) steeper margin squeeze, (ii) slower-than-expected loans & deposits growth, (iii) higher-than- expected rise in credit charge and further slowdown in capital market activities, and (iv) adverse currency fluctuations.

Source: Kenanga Research - 26 Oct 2018