What’s New

• 4Q/FY16 earnings ahead of consensus; revenue growth supported by superior loan growth

• 2017 remains a challenging year; cautious guidance but above industry growth still expected

• Lower loan, deposit and credit cost assumption led us to trim FY17-18F earnings by 2-3%

• Maintain BUY, with lower TP of RM22.50; remains our top pick among Malaysian banks

Stellar delivery despite challenges

Still making headway amid challenging times, BUY. Public Bank (PBK) is our top pick among Malaysian banks. Our BUY rating is premised on its sustainable earnings and robust asset quality. Despite macro headwinds, we expect PBK to continue to deliver above-industry growth and dominant market share in mortgages, auto and SME segments. Contribution from the unit trust business will continue to differentiate it from peers. PBK’s ability to safeguard its asset quality despite years of outperforming industry growth attests to the success of its prudent practices.

4Q/FY16 net profit above consensus expectations. 4Q16 earnings were largely driven by recoveries and lower taxes but were operationally underpinned by robust revenues and expense trends. NIM improved q-o-q due to active management of its wholesale deposit balances vs growing core deposits while loan yields were largely stable. Non-interest income stayed strong driven largely by unit trust fees and banking-related commissions. Overall, PBK delivered a stellar set of FY16 earnings despite challenges faced in the industry. Loan and deposit growth moderated from a year ago, albeit still above industry levels. A final DPS of 32 sen was declared, bringing full- year DPS to 58 sen (43% payout). Capital ratios and asset- quality indicators stayed robust.

Trim earnings by 2-3% over FY17-18F; PBK will still defy headwinds. We have imputed lower loan and deposit growth of 7% and 5% respectively (previously 8% for both). The impact was mitigated by a lower credit cost assumption of 6bps (from 9bps). Although growth expectations have moderated slightly and the industry appears to be seeing more challenges ahead, PBK remains the silver lining in the banking sector as its financial metrics (such as loan growth, deposit growth, asset quality and cost efficiency) remain superior to its peers.

Valuation:

Our target price of RM22.50 (implying 2.3x FY17F BV) is derived using the Gordon Growth Model and assumes 9% cost of equity, 4% long-term growth and 15% ROE (previously 16%). PBK’s premium valuation vs. peers is justified, as it continues to deliver solid growth and quality trends, contrary to peers.

Key Risks to Our View:

Failure to sustain above-industry growth and asset quality. A key de-rating factor for PBK would be the failure to sustain its excellent growth and asset quality track record, as well as faltering market share in segments which it excels in.

Source: Alliance Research - 03 Feb 2017