We maintain our GGM-derived PBV TP of RM5.10 (COE: 9.9%, TG: 4.0%, ROE: 13.0%) and OUTPERFORM call. Relief in NIMs may be short lived and PBBANK intends to stay conservative by managing risks. That said, the fact that PBBANK remains comfortable to release its LLC going forward indicates a steadier handle on asset quality and is consistent with a positive outlook on Malaysia. The recently completed acquisition of LPI is expected to generate synergistic gains, capitalizing on an expanded agent network and enhanced cross-selling opportunities.

Key takeaways from our recent meeting with the group are as follows: i. Spreading risks prudently. With regards to participating in Johor's Special Economic Zone initiative, the group intends to be selective with its involvement to stay well-diversified across its geographical and away from large corporate portfolios to be up to 15% of their total loans book. SMEs are preferred (making up 18% of total loans) for their typically higher margin, stand to benefit from the supply chain spillover from upcoming developments such as data centre and other infrastructure projects. ii. NIM stability hopeful despite competition. PBBANK looks to close FY24 with a positive landing to NIMs (stable to +1 bps, from FY23: 2.20%), which was a positive surprise to us given much conservatism on margin retention at the start of the year. Led by the trimming of deposit rates (Oct 2024 fixed deposit board rates up to 2.50%), the group still sees favourable reception for its longer-term deposits (YoY, Sep 2024 +4.0% vs. industry +3.3%), which we attribute to its sticky retail clientele.

The group will leverage on financing rates to improve its NIMs going forward, though its peers will likely deploy a similar mindset thus redirecting competition to this space. Hence, we opine the group's target towards SMEs to be apt. iii. Eyeing a gradual release of LLC. A credit cost target of <10 bps will likely extend into the long term thanks to continued discipline surrounding asset quality. Amid its prudency, the outstanding overlay of RM1.6b is preserved to safeguard against sudden shift in macros. The group opines to do well at a pre-pandemic LLC of 120% (3QFY24 at 154%) which translates to a writeback in provisions of up to RM855m. Still, such release is expected to be gradual to avoid indiscreet restocking of provisions. iv. Synergies from LPI to materialise. We gather that 25% of LPI's business presently originated from PBBANK, predominantly in its fire (mortgage) and motor (hire purchase) class products The completion of LPI's acquisition presents more opportunities for collaboration by tapping into its wide agent network (over 3,000 personnel) and PBBANK's 200 physical branches.

The larger footprint would enable more effective cross selling of both insurance and financing products which could also be bundled for more attractive propositions, with LPI's M.A.T. and healthcare products possibly seeing the most traction going forward.

Forecasts. Maintained with FY24 ROE target of >12.5% looking to be met (9MFY24: 12.9%). Our FY25F earnings for LPI of RM367m would translate to an additional 5% to PBBANK's earnings, before accounting for synergistic gains.

Maintain OUTPERFORM and TP of RM5.10 based on an unchanged GGM-derived PBV of 1.54x (COE: 9.9%, TG: 4.0%, ROE: 13.0%) on a FY25F BVPS of RM3.14. We also applied a 5% premium to our TP based on our 4-star ESG rating, led by the stock's strong EEV financing pipeline.

PBBANK is expected to continue commanding a leading GIL ratio amongst peers 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 selective investors. Currently unfactored are synergies from the injection of LPI which we anticipate to be positive.

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 - 9 Jan 2025