No surprises with PBBANK’s 3M19 core earnings coming in within expectations, accounting for 25%/24 of both our and market estimates. No change in estimated earnings; thus maintain TP of 24.10 and MARKET PERFORM call. Despite challenging loans growth, operational efficiency will see stable asset quality supporting earnings ahead.

In line. 3M19 net profit (NP) of RM1.41b is in line, accounting for 25%/24 of our/consensus estimates. Consistent with the theme for 2018, earnings were supported by falling impairment allowances as top-line growth was challenging. No dividend declared as expected, as dividends are normally announced in the second and final financial quarters.

Results review YoY. 1Q19 CNP of RM1.41b was supported by the absence of impairments with recoveries recorded (RM2.9m vs. 1Q18: RM-69.3m). Top-line fell marginally (-0.7%) as NOII and NII fell 1.6% and 1%, respectively, but mitigated by improving Islamic Banking income (+3.4%). Loans improved by 100bps at +4.4% (vs. guidance/expectation of ~+5%+4.5%). As guided, NIMs compressed (but below guidance) by 15bps (vs. 5-10bps compression). Asset quality continued to be stable with GIL at 0.5% (vs. industry’s 2.0%) but net credit charge exceeded expectations (5-10bps) due to a net credit recovery of 0.4bps (due to high recovery rate 1.06x vs average 0.6x). At 34%, CIR remained the lowest in the industry (48%).

QoQ, CNP was flat, as top-line improved slightly (by 70bps) to +1.1%) mitigated by higher opex of +4.4%. After moderating in the last 3 quarters, loans improved by 10bps to +1.0% with NIM continuing to compress by another 5bps to 2.1%. While NOII continued to be woeful YoY, the quarter saw improved performance (+10.4%) on gains from financial instruments of RM57.9m.

Unchanged stance. We understand from management that the focus will still be on defending asset quality as macro environment are ‘still challenging’. While NIM compression escalated above guidance, we believe that management will be able to manage its deposits intake (to minimise compression with higher intake of cheaper funding in the coming quarters; CASA growth outpaced FDs – +5% YoY vs +3% YoY in 1Q19. Despite a credit recovery, we made no change to our credit charge estimation (6-10bps) as we believe recoveries will taper off – we believe the high recoveries were due to i) loans that were classified R&R, performing after the mandatory 6 months and ii) over provisioning from last year which resulted in higher writeback .

Earnings unchanged. As results came in line, we maintained our FY19E CNP of RM5.58b based on these assumptions; (i) loans to grow at ~4.5%, (ii) NIMs at mid-single digit compression, (iii) credit cost of 6- 10bps, (iv) CIR of 34%, and (v) ROE of 13.7%.

TP maintained at RM24.10 based on an unchanged FY19E PBV target of 2.3x (implying a +1.0x SD above mean). We feel its justifiable given PBANK’s operational efficiency and excellent asset quality which will support earnings ahead in spite of the challenging loans and NIM. Maintain MARKET PERFORM. Key risks to our earnings estimates are: (i) lower-than-expected margin squeeze, (ii) higher-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 - 30 Apr 2019