We maintain our GGM-derived PBV TP of RM4.90 (COE: 9.7%, TG: 4.0%, ROE: 13.0%) and OP call. The group anticipates moderation in loan growth pressurised by domestic and global macros and net interest margins (NIMs) softness. That said, we frame PBBANK as a highly sustainable bank given its high-quality books. Its industry-leading gross impaired loan (GIL) could win favours amidst softer sentiment in the banking sector. PBBANK is one of our 2QCY23 Top Picks.

Key takeaways from our recent meeting with the group are as follows:

i. Loans quality over quantity. For FY23, the group indicated a loans growth target of 4%-5% which we gathered is among some of the most conservative against its peers, in lieu of highly prudent credit assessment to selectively imbue assets of better quality. That said, it is indicated that the demand of residential properties remains strong, mainly led by owner-occupied transactions. Meanwhile, its hire purchase books could see a sequential boost led by 2022 SST exemption in the earlier periods but will moderate subsequently.

ii. With regards to SMEs, the group believes present conditions allow for more aggressive participation where it had cautiously shied away due to pandemic-induced uncertainties. However, we anticipate this space to be highly competitive as the industry has marked it to be of “high growth” post Covid-19 lull.

iii. Given this, a credit cost target of <10 bps (FY22: 10 bps) is still intact, with an existing management overlay of c.RM1.7b on tow to be utilised when needed. Gradual exhaustion will lead to Loan Loss Coverage ratios to normalise to pre-Covid’s 120% levels from 272% in 4QFY22. However, the quantum and timing of provision of write-backs are still dependent on developing uncertainties.

iv. NIMs pressured by deposits competition. The increasingly attractive deposit rates (mainly termed deposit products) is a consequence of rising OPR (+100 bps from May 2022 to Nov 2022). As BNM has temporarily pause OPR hikes, it is likely that the banks will ease on their respective interest rate pricing as forward expectation for OPR changes.

v. The group hints of a double-digit compression of NIMs. As most of the aggressive pricing was conducted in the later half of FY22, the spill-over from the refreshing of maturing deposits will heighten the cost of funds. We expect this to be more prominent in 1HFY23. However, given that it saw a +17 bps improvement during the OPR up-cycle, this guidance merely indicates a normalisation of group margins.

vi. Better hopes for non-interest income (NOII). FY22 NOII declined by 8% owing to a drag in unit trust fee and stockbroking income. While this could be due to a strong FY21 equities performance, the group anticipates for better readings as market activities pick up. The group is also highly focused on domestic investment products which performances are seen as not vulnerable to adverse foreign market movements. That said, NOII which only makes up 20% of the group’s total income will require significantly stronger traction to carry overall earnings.

Forecasts. Post updates, we leave our FY23F/FY24F assumptions unchanged as guidances are maintained, pending 1QFY23 results’ release next month. We anticipate FY23F to see a 14% earnings growth mainly on the back on the lapse of FY22 prosperity tax.

Maintain OUTPERFORM and TP of RM4.90. Our TP is based on: (i) an unchanged GGM-derived PBV of 1.58x (COE: 9.7%, TG: 4.0%, ROE: 13.0%) on FY24F BVPS of RM2.94 and (ii) a further 5% premium top-up based on our 4-star ESG rating, led by the stock’s strong green financing pipeline.

PBBANK is expected to continue commanding the leading GIL ratio amongst peers (0.4% vs. peers’ average of 1.7%) which could be attributable to its densely collateralised housing loan portfolio. While the stock may not have the highest dividend yield, the possibility for more dividend payment frequencies to the current biannual payment could interest certain investors. We believe investors will seek banks with higher safety nets on the back of softness in appetite for financial institutions. Further clarity in PBBANK’s shareholding structure could also serve as a positive re-rating for the stock in due course. PBBANK is one of our 2QCY23 Top Picks.

Risks to our call include: (i) higher-than-expected margin squeeze, (ii) lower-than-expected loans growth, (iii) worse-than-expected deterioration in asset quality, (iv) slowdown in capital market activities, (v) unfavourable currency fluctuations, and (vi) changes to OPR.

Source: Kenanga Research - 18 Apr 2023