Kenanga Research & Investment

Public Bank - Stellar Credit Cost in Tow

Publish date: Thu, 30 Nov 2023, 10:30 AM

PBBANK’s 9MFY23 net profit (+14% YoY) is within expectations. The group is on track to meet its full-year targets and has likely seen the worst being over with regards to margin compression. While the group appears to be doing very well with its asset quality, its substantial management overlay remains intact as the group continues to stay prudent. Maintain OUTPERFORM and GGM-derived PBV TP of RM4.75.

9MFY23 within expectations. PBBANK’s 9MFY23 net profit of RM5.03b made up 74% of our full-year forecast and 75% of consensus full-year estimate. No dividend was declared as expected, as the group typically pays them biannually.

YoY, 9MFY23 total income was stable (+1%). Net interest income was flattish owing to lower NIMs (2.20%, -11 bps) negating a higher loans base (+5%). Non-interest income did offer some support (+3%) on better forex and stock broking performance. Cost-income ratio tipped slightly to 33.7% (+1.1 ppt) from higher personnel cost amidst the stagnant top line. On the flipside, credit cost came in at only 2 bps (-8 bps) as provisioning needs remained low from sufficient pre-emptive buffers being booked previously. Paired with lower effective taxes, 9MFY23 net profit came in at RM5.03b (+14%).

QoQ, 3QFY23 saw similar patterns emerging but with the benefit of expanding NIMs (2.22%, +6 bps) as funding costs have normalised. While further expansion here could be expected, it may remain softer as compared to FY23. 3QCY23 net profit reported at RM1.70b (+5%),

Briefing highlights. The group opines that it is in a position to deliver steady earnings, albeit with some possible challenges in the 4QFY23 period.

1. PBBANK’s loans growth target of 4%-5% is expected to be achieved for FY23, with its solid presence in the mortgage space likely to be unhindered, albeit possibly lower as compared to FY22 no thanks to the higher rate environment. At the meantime, appetite remains stable for hire purchases and SME accounts. That said, the group emphasised on only acquiring quality assets as to not compromise its books.

2. The group had guided for NIMs to not compress more than 20 bps from FY22 of 2.39%. This will likely be held by deposit rates recovering to more favourable levels to banking operations. That said, 4Q’s seasonal rush to capture deposits may limit the upside towards NIM recovery.

3. With regards to liquidity, the group opines that it is unconcerned by its loans-deposits ratio of 96.5% encroaching close to 100% as its liquidity coverage ratio remains sufficient at 137% (albeit lower than industry’s 151%).

4. On its especially low credit cost, the group intends to continue exercising prudence particularly on various SME segments. While certain repayment assistance programs still exist, it will not account for more than 1% of the group’s overall loans book. Additionally, its sizeable overlay of RM1.8b remains unchanged with no apparent urgency to write back at this moment.

Forecasts. Post results, our FY23F/FY24F earnings undergo minor tweaks (- 1%/+1%) following 3QFY23’s inputs.

Maintain OUTPERFORM and TP of RM4.75. Our TP is based on an unchanged GGM-derived PBV of 1.54x (COE: 9.9%, TG: 4.0%, ROE: 13.0%) on FY24F BVPS of RM2.94. We also applied a 5% premium to our TP 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 a more than biannual dividend payment could be of interest to certain investors.

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) further slowdown in capital market activities, (v) adverse currency fluctuations, and (vi) changes to OPR.

Source: Kenanga Research - 30 Nov 2023

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