We  hold  the  view  that  Public  Bank  should  continue  to  offer  investors stable earnings amid softer corporate lending and capital markets given that  it  is  less  reliant  on  these  segments.  Asset  quality  and  cost efficiency  are  the best in class while the  recent  rights issue  will  place the group as one of the best capitalised banks domestically.  That said, all these appear priced in. Maintain NEUTRAL with MYR18.60 FV.

• Stability amid muted business lending and capital market activities. A  consistent  message  from  our  recent  meetings  with  banks  was  that business  lending  has  been  subdued  while  the  capital  markets  remain quiet,  albeit  with  some  improvement  from  1Q14.  Given  that  Public Bank’s loan book is skewed towards the household segment while noninterest  income  is  less  reliant  on  capital  markets,  the  group  should continue  to  offer  investors  earnings  stability,  in  our  view.  The  main challenge  we  see  is  the  continued  pressure  on  net  interest  margins (NIM). We estimate that 1Q14 NIM fell 16bps y-o-y (-6bps q-o-q), mainly due to lower average asset yield. As  we stated  in our sector report, we expect  the  two  largest  banks  –  Maybank  (MAY  MK,  BUY,  FV: MYR11.00)  and CIMB (CIMB MK, NEUTRAL, FV:  MYR7.75)  –  to  grow deposits  more  aggressively  ahead,  which  could  put  more  upward pressure on the industry’s  funding cost.  For now, we keep our 6bps NIM compression assumption for FY14F unchanged.
• Forecasts.  We  have  incorporated  the  recent  rights  issue  into  our numbers.  We have not factored in any earnings enhancement from the proceeds,  but  the  enlarged  share  and  shareholders’  equity  base  have resulted in  3%/9%  dilution to our FY14F/FY15F  EPS forecasts, as well as  revised  FY14F/FY15F  ROE  projections  of  18.2%/16.2%  from 20.2%/19.3% respectively.
• Investment case.  We are adjusting our GGM-derived  FV to  MYR18.60 from MYR1925 as the stock has gone ex-rights. Our previous FV was on a cum-rights basis and reflected the rights issue on a proforma basis. Our  GGM-assumptions  (unchanged)  are:  i)  COE  of  8.9%;  ii)  ROE  of 16%; iii) long-term growth of 4.5%, and iv) FY14F BVPS of MYR7.14 .  In our view,  the group  offers investors  good earnings predictability, sound asset quality and cost efficiency. The rights issue  may  also help lift the capital issue overhang and place the group as one of the best capitalised banks  domestically.  That  said,  we  think  the  stock’s  valuations  already reflect much of the positives, and hence retain our NEUTRAL call.

Source: RHB