PBANK’s 1QFY20 results broadly tracked expectations (ex modification losses). While FY20 ROE has been guided down, management appeared confident that asset quality issues can be contained. No details yet on the Day One modification losses. We retain our RM16.30 TP and MARKET PERFORM call. Trading at FY20E PER and PBV of 13.2x and 1.3x, respectively, revenue headwinds need to ebb before the stock can be rerated, in our view.

In line. PBANK reported 1QFY20 CNP of RM1.3b, down 6%/5% YoY/QoQ. While this made up 30% of our and 26% of consensus full-year estimates, we consider the results to be within our expectation. 1QFY20 credit cost was just 7bps (vs. our FY20 estimate of 21bps) but should rise ahead. Our forecast has also partly captured the impact of Day One modification losses, where we had estimated the full impact to be c. RM1.2b. Excluding this, 1Q pre-impairment operating profit made up 25% of our full-year forecast.

Results’ review. 1QFY20 CNP was dragged by: (i) NIM pressure (-6bps YoY/-9bps QoQ) following two OPR cuts in 1Q20, (ii) Negative jaws with opex up 8% YoY/1% QoQ vs. income growth of 2% YoY/-2% QoQ. Thus, CIR ticked up to 35.7% (1QFY19: 33.8%; 4QFY19: 34.6%), and (iii) Higher credit cost (1Q19: negligible; 4Q19: 5bps), with 2bps credit cost in 1QFY20 relating to preemptive provisioning. 1QFY20 loan growth was muted at +4% YoY/+1% QoQ with decent traction from Cambodia and Vietnam supported by stable domestic growth. Deposit growth kept pace, with the LDR unchanged YoY and QoQ at 93%. One bright spot was non-interest income (+6% YoY, flat QoQ), with brokerage, trading and unit trust doing well. Also, GIL fell 4% YoY and 5% QoQ, mainly from local operations. GIL/LLC ratios were 0.5%/132%. Overall, 1QFY20 annnualized ROE was 12%, trailing the original 13% target.

Conference call highlights. In our view, the key positive surprise was PBANK’s guidance on credit cost of within 15bps. This is in stark contrast to the 75-120bps its peers were guiding and PBANK’s own 50-55bps charge off rate during the Global Financial Crisis. Management argued that the 15bps would already be 2-2.5x higher than recent run rate and is supported by continued improvement in its credit underwriting process over the years. The guided 15bps reflects deteriorating macro variables and pre-emptive provisioning. Thus, it leads the GIL cycle, where a more meaningful uptick will be pushed back to 2021 given the automatic loan moratorium (85% of customers qualify with 10% opting out) and loan restructurings. As for NIM, PBANK now expects a higher squeeze of 15bps (from 5-10bps) due to the 50bps OPR cut in May but excludes further OPR cuts and Day One modification loss. For now, there were no further details on the modification loss, apart from that the banks are working to resolve this. Dividend payout of 50% should be sustainable as capital and loan loss coverage are at comfortable levels. Finally, revised ROE guidance now stands at double digits (from 13%).

Earnings unchanged, as we await for further developments on the Day One modification losses. Over the weekend, TheEdge reported that banks are in talks with authorities to mitigate the Day One impact. Measures proposed include soft loans and tax deductions. While incrementally positive, if approved, such measures are unlikely to be able to fully compensate the HP interest banks will be waiving.

MARKET PERFORM and RM16.30 TP maintained. Our TP is based on a GGM-derived PBV of 1.39x that we ascribe to our FY20E BVPS. In our view, PBANK’s key headwind is revenue-related rather than asset quality, which some of its peers face. Apart from NIM squeeze, the full impact from Day One modification losses is significant. Beyond that, we think PBANK’s earnings profile should offer investors superior resiliency.

Source: Kenanga Research - 27 May 2020