PBBANK’s FY19 core earnings came in within expectations, accounting for 99% each of our/consensus estimates. Management guided for cautiousness ahead given the prevailing uncertainties. We reduce our already conservative FY20E earnings by 6%, and revised down TP to RM20.70 (from RM22.10) as we ascribed to a lower PBV of 1.89x to reflect lower ROEs going forward. Maintain OP call given its undemanding valuations and better dividend yields.

In line. FY19 CNP of RM5.5b (-1.4% YoY) is in line, accounting for 99% each of our/consensus estimates. DPS of 73.0 sen (vs FY18: 69.0 sen) is within our estimate of 69.0 sen, representing a payout ratio of 51% (FY18: 48%).

Asset quality resilient. YoY, the slight dip in CNP was dragged by a higher tax rate of 22% (vs FY18: 20%) as top-line improved +2.4% to RM11.1b supported by fall in impairment allowances of 12% to RM152m. The improvement was mitigated by higher opex of +7% (pushing CIR by 140bps to 34.4%. Despite the soft capital market NOII improved +8.4% due to gains from financial instruments (+>100%) to RM168m and better forex (+38%) to RM336m. Loans improved at +4.1% (Domestic - +4.5%) but there was a 5bps NIM compression which saw flattish NII. Islamic banking continued to be resilient (+5.8%) as financing grew at +8.9%. Asset quality was as resilient as ever with both GIL and credit charge resilient at 0.5% and 0.05%, respectively.

Resilient top-line. QoQ, there was improvement sequentially, as CNP improved +3% to RM1.4b on account of better top-line (+3%) with impairment allowances falling 5% to RM43m. NII improved +3% on account of improved NIM (+2bps - as asset pricing improved and funding costs retreated) as loans grew moderately (-10bps to +1%). QoQ, asset quality was maintained with both GIL and credit charge stable at 0.5% and 0.06%, respectively.

Modest targets. Moving into 2020, managements’ lending focus will be on mortgage and HP with continued focus in the SME market in encouraging sectors. While management stress on balancing growth with escalating costs of funds, we believe that management will strive for shoring its deposits ahead from retail & low-costs deposits and sustaining existing deposits; thus, adding downside pressure on NIM with the added pressure of another OPR cut. Management guided for a modest target for FY20 given the uncertainties ahead; (i) loans growth at ~4%, (ii) NIMs 5-10bps compression, (iii) credit cost of 15bps, (iv) CIR of 34-35%, and (v) ROE of 13%. Its loans exposure to China related business is around 2% and asset quality will likely stay resilient with the moratorium and Restructured & Rescheduled process in place to affected companies.

FY20E earnings revised downwards. Our FY20E CNP is reduced by 6% to RM5.4b mainly on account of moderate loans and NIM pressure ahead in the face of a moderating economy and volatilities ahead. We introduce our FY21E earnings, where we expect slight improvement in CNP by 3.0% to RM5.6b on account of better loans. Our assumptions; (i) loans growth at >4%, (ii) NIMs 6bps compression, (iii) credit cost of 6bps, (iv) CIR of 34-35%, and (v) ROE of 13%.

TP revised to RM20.70 (from 22.10) as we lower our PBV target to 1.89x (from 1.95x) implying a 1.5SD below mean (to account for the uncertainties and volatilities ahead. We feel this is justifiable given that its forward ROEs are expected remain at ~13% (vs. 5-year mean of >16%) when a PBV of over 2x was justifiable. At current level, the stock looks undemanding and with dividend yields looking better, we maintain 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 - 27 Feb 2020