PBBANK’s 9MFY19 core earnings came in within expectations, accounting for 74%/72% of our/market estimates. Positively, we saw sequential improvement in NII on NIM recovery with allowances and opex trending lower, Though below its internal target of 5%, PBBANK’s loans growth of 4.1% for 9M probably reflects its conservative lending policy considering challenging market conditions, noting that its excellent asset quality remains second to none. We make no changes to our conservative earnings estimates but revised down TP to RM22.10 (from RM25.20) as we ascribed a lower PBV of 1.95x to reflect lower ROEs going forward but maintain an OP call given that its share price looks bottoming out.

In line. 9MFY19 CNP of RM4.1b (-2% YoY) is in line, accounting for 74%/72% of our/consensus estimates. No dividend declared as expected.

NII dragged by narrowing NIM. YoY, 9MFY19 CNP was dragged primarily by higher opex (+5.5) as top-line improved by +1.5% to RM8,252b. Top-line was underpinned by resilient Islamic Banking and NOII (at +6.2% and +5.8%, respectively) as NII was marginally down at 0.5%. Drag in NII was seen on account of narrowing NIM (-7bps and in line with expectations) despite loans improving at +4.1% (vs. system with growth of +3.8%). Loans were still driven by housing (+8.3% to RM118b) with HP and corporate lending moderating by 90bps and 140bps, respectively, to +0.8% and +2.3%. The strong NOII was driven by exceptional gains in financial instruments (+>100%) to RM134m. No improvement in CIR as it was up a percentage point on account of opex outpacing top-line. Asset quality was as resilient as ever with both GIL and credit charge improving; the former stable at 0.5% with credit charge improving by 1bps to 0.05%. The strong credit charge was due to strong recoveries at +33% to RM191m while provisioning for expected credit losses (ECL) fell 28%.

Better sequential NII offset by dismal NOII. CNP for the quarter rose 2.2% q-o-q to RM1,363m on account on lower opex (-0.4%) and impairment allowances (-24%) to RM49m. Top-line was marginal at RM2,759m on account of NOII falling 11% (after two quarters of positive growth) while Islamic banking and NII improved at +11% and +2% on account of better NIM (+6bps; as asset pricing improved as funding costs retreated) and loans (+1.1%), respectively. QoQ, asset quality maintained its quality with GIL stable at 0.5% and credit charge falling by 2bps to 0.06%.

PBBANK’s low risk appetite undermining earnings prospect. Despite the accommodative interest rates, its retail loans growth has been slow with the Bank’s +5% YoY loans target looking challenging. The volatile NOII (with YoY improvement driven by gains) have also contributed to the moderating top-line with the resilient asset quality supporting earnings as credit costs are well contained. Despite the strong asset quality and accommodative interest rates, we opined that PBBANKs’ cautious stance and low risk appetite could translate to soft earnings and ROEs ahead.

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 revised to RM22.10 (from 25.20) as we lower our PBV target to 1.95x (from 2.2x) implying a 1SD below mean. We feel this is justifiable given that its forward ROEs are expected remain at the 13-14% which is below history (vs. 5-year mean of >+16%) when a PBV of over 2x was justifiable. However, with share price looks bottoming out (PBV trading at -2SD below mean), we reiterate our OUTPERFORM call.

Key risks to our earnings estimates are: (i) higher-than-expected margin squeeze, (ii) lower-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 - 8 Nov 2019