As usual, no surprises with PBBANK’s 12M18 core earnings coming in within expectations, accounting for 98% of both our and market estimates. Despite the positive results, we cut our FY19E earnings estimates slightly to reflect the challenging environment ahead. However, while cautious on its outlook, we are positive on its asset quality and maintain our PB ratio, resulting in a higher TP of RM24.10 (from RM23.85). Reiterate MARKET PERFORM.

PBBANK's 12M18 core net profit (CNP) is in line at RM5.6b accounting for 98% of our and consensus estimates. Consistent with the theme for 2018, earnings were supported by falling impairment allowances as top-line growth was challenging. DPS of 69.0 sen (vs FY17: 61.0 sen) is within our estimate of 63.0 sen, representing a payout ratio of 43%.

Results review. YoY, FY18 CNP of RM5.59b was supported by receding impairments (-12.0%). Total income growth was soft (+0.9% YoY) dragged by falling NOII (-5.0%) to RM2.2b. NII moderated by +2.0% dragged by falling NIMs (of 7bps vs. the estimated decline of 4bps) but loans growth improved 60bps YoY to +4.2% (vs. system/guidance of 5.6%/4.5%). Asset quality was consistently stable at 0.5% (vs industry’s 2.1%) with credit charge at 5bps (vs. guidance/guidance estimated of 15/10bps). CIR is still the lowest in the industry at 33% vs. industry average of 47%. QoQ, CNP rebounded by +1.6% supported by falling impairment allowances of +23.7%. Top-line moderated at 0.4%, dragged by falling NOII (-4.7%) to RM529m. NII rebounded at +1.6% despite loans moderated by 30bps QoQ to +0.9% as NIMs was stable at 2.2%. Asset quality remained stable with GIL at 0.5% and credit costs improving by 2bps to 0.04% .

Cautious ahead. Moving into 2019, we understand from management the focus will be on defending asset quality as external and internal challenges are still prevalent. While management stress on balancing growth with escalating costs of funds, we believe that management will strive for shoring its deposits ahead; thus, downside pressure on NIM will likely prevail. While PBBANK’s focus will still be on residential properties and hire-purchase, its asset-quality centric will see challenging growth from these segments. 2019 Management Targets

are; i) loans growth at ~5%, ii) NIMs at mid-single digit compression, credit cost of 15bps, iv) CIR of 34-35% and v) ROE of 13-14%. Our assumptions are; loans to grow at ~4.5% (from 4.2% previously), ii) NIMs at mid-single digit compression (-5bps from -2bps), credit cost of 6bps (vs. 10bps previously), iv) CIR of 34% (vs. 32% previously), and v) ROE of 13.7% (vs. 15% previously).

FY19E revised downwards. Our FY19E earnings are reduced by 7% to RM5.6b mainly on account of lower NOII (-25% YoY) in the face of a moderate economy and volatile capital markets. We introduced our FY20E earnings, where we expect slight improvement in earnings by 3.5% to RM5.8b on account of higher loans and better contribution from NOII.TP revised to RM24.10 from (RM23.85) based on a blended PB/PER of 2.3x/17.0 FY19E (from 2.3x/15.0 previously). The higher PE is to reflect improving loans growth ahead (FY17:+3.5%, FY18:+4.2%), while the PB is to reflect stable asset quality ahead. We maintain our

MARKET PERFORM call despite the challenging environment ahead due to its operational efficiency.

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

Source: Kenanga Research - 21 Feb 2019