No surprises with PBBANK’s 6M19 core earnings coming in within expectations, accounting for 49%/48% of our/market estimates. While making no changes to our conservative earnings estimates; we raised TP to RM25.20 (as we rollover to FY20E) with an upgraded OUTPERFORM call. Despite challenging loans growth, operational efficiency will see stable asset quality supporting earnings ahead.

In line. 6M19 CNP of RM2.73b (-2.1% YoY) is in line, accounting for 49%/48% of our/consensus estimates. While NII came under pressure, both Islamic Banking and NOII improved while asset quality held. An interim DPS of 33 sen (1H18: 32 sen) was declared (in line).

YoY, loans growth on par with asset quality consistent as ever. 6M19 CNP was supported by improvement in both Islamic Banking (+3%) and NOII (+8%) while NII fell (-1%) on account of narrowing NIM. NOII was supported by strong improvements in other operating income (+12% to RM226m) and gains on financial instruments (>100% to RM113m while net fee and commission income fell (-2%) to RM880m. Loans growth was commendable at +4.2% (vs system of +4.2% vs target: +5%). NIM compressed by 12 bps (vs 5-10bps target) due to OPR cut in May 2019 (vs OPR being raised in Jan 2018) and competitive lending. Asset quality was mixed as credit charge saw a 2bps uptick to 8bps (but still within target and guidance of 10-15bps) while GIL remained steady at 0.5%. PBANK remained consistently efficient with CIR at 34% (vs industry’s 48%).

QoQ, CNP of RM1.33b fell 5% as topline growth was marginal (<1%) vs higher opex (+3%). The quarter saw the absence of gains (1Q: RM3.3M) as impairments jumped >100% to RM65m. Loans was stable (+1%) while NIM saw compression by 6bps due to the May 2019 cut. For the quarter, asset quality was still mixed as credit charge jumped 8bps (due to the absence of writebacks) while GIL remained constant at 0.5%.

Expect improvement in loans in 2H. Given the global trade friction and volatilities in the financial markets, PBANK expects moderate growth in the banking system but expects its loan target of +5% to be achievable as 2H is expected to be driven by the retail segment. We expect lending pressure to remain but believe asset pricing has bottomed out, which will see NIM compression for FY19E to be under high single-digit (as re-pricing of deposits kicks in by end of the year). However, we do not discount additional uptick in NIM compression in the event of another OPR cut in Sep 2019. We believe that PBANK’s risk appetite for retail loans is still sustainable given that its asset quality is still consistently strong (GIL; <0.5% with credit costs the lowest in the industry (8bps vs 21bps) and at the same time the low interest rate environment will support credit demand and credit recoveries.

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

TP raised to RM25.20 (from RM24.10) as we roll-over to FY20E with an unchanged PBV target of 2.22x (implying a +0.8SD above mean) We feel this is justifiable given PBANK’s operational efficiency and excellent asset quality which will support earnings ahead in spite of the challenging loans and NIM. Valuations are attractive and undemanding with the recent drop in share price unjustified given the consistent asset quality and still manageable growth. Given that its share price is almost bottoming out, we raised PBBANK’s rating to OUTPERFORM.

Source: Kenanga Research - 15 Aug 2019