We upgrade Public Bank to BUY from Neutral with a  higher GGM-based TP  of  MYR21.00  from  MYR20.60  (14%  upside).  Its  4Q14  results  were robust,  underpinned  by  above-industry  loan  growth,  well-controlled overheads and solid asset quality, which helped keep  credit cost  low. We think Public Bank ticks the right boxes as a banking stock investors should own amid an uncertain and volatile macro environment.

Public 4Q14  net profit of MYR1.25bn (+22% YoY, +5% QoQ) was  at the  upper  end  of  our  and  consensus  estimates  range,  with  2014  net profit  of  MYR4.52bn  (+11%  YoY)  accounting   for  103%  of  our  and consensus net profit forecasts.

Results highlights. Positives include: i) group and domestic loan growth of  10.8%  and  10.5%  outpacing  8.7%  domestic  system  loan  growth;  ii) +13%  YoY/+4%  QoQ  growth  in  4Q14  non-interest  income,  thanks  to stronger forex and unit trust fee income; iii) 4Q14 overheads remained under control. Public Bank’s cost-income ratio (CIR) of 28% is the lowest among  peers;  iv)  solid  asset  quality.  Absolute  gross  impaired  loans declined 3% QoQ while gross impaired loan ratio and loan loss coverage (including regulatory reserve) of 0.6% and 219% are ‘best in class’; and v)  estimated fully-loaded group and bank common equity tier 1 (CET-1) ratios were  10.7%  (Sep: 10.3%)  and  10.2%  (Sep: 9.9%) respectively  –among  the  highest  in  the  industry.  On  the  flipside,  4Q14  net  interest margin (NIM) contracted by an estimated 8bps QoQ (-6bps YoY) due to higher funding cost (+19bps QoQ; +33bps YoY). That  said, this was not too surprising given the time lag in the repricing of interest -rate sensitive liabilities from Jul 2014’s OPR hike, and competitive pressures.

Loan  and  deposit  growth.  Key  loan  growth  drivers  were  residential mortgages (+12% YoY) and lending to SMEs (+20% YoY). Meanwhile, total customer deposits  rose  10% YoY/+3% QoQ  while current account and  savings  account  (CASA)  deposits  grew  8%  YoY/3%  QoQ.  Hence, loan -to-deposit (LD)  and CASA ratios  were generally  stable QoQ at 88% and 25% respectively.

Dividends.  As  expected,  a  second  interim  net  DPS  of  31  sen  was declared (4Q13: 30 sen, net), bringing 2014 net DPS to 54 sen (2013: 52sen, net). The full-year dividend payout ratio was 46%.

Forecasts  and  investment  case.  We  update  our  2015-16F  earningsforecasts  for the 2014 results  and introduce our  2017F numbers.  We lift our  GGM-derived  TP  to  MYR21.00  (from  MYR20.60)  following  the updates and raise our call to BUY from Neutral.

Briefing highlights
2014  targets  met,  now  for  2015.  Public  Bank  met  its  2014  targets,  which  are:  i) ROE  of >18%  (adjusted for rights issue)  (2014: 18.7%);  ii) total capital ratio of >12%(2014: 15.8%);  iii) gross impaired loan ratio  of <1%  (2014: 0.6%);  iv) CIR  of <32%
(2014: 30%);  v) loan growth of 10-11%  (2014: 10.8%), and vi) deposit growth of 10-11% (2014: 10.2%).

For  2015,  Public  Bank  targets:  i)  ROE  of  >16%;  ii)  total  capital  ratio  of  >13%;  iii) gross impaired loan ratio  of <1%;  iv) CIR  of <32%;  v) loan growth of  9-10%;  and vi) deposit growth of 9-10%. The slower  loan and deposit growth targets for 2015  vis-à
vis  2014 take into account the more challenging macro environment due to subdued consumer and business sentiment, among others. On the flipside, management said that labour market conditions were still holding up, which would help keep household income levels and asset quality intact. Also, Public Bank still sees sustained demand for  affordable  residential  properties.  Overall,  management  said  the  loan  approval pipeline was stable and should help support growth  ahead. As with previous year’s targets,  we  think  some  of  the  targets  are  rather  broad-based  but  generally, achievable.

Rate of NIM compression expected to ease.  Apart from the above, management guided  for  2015  NIM  compression  of  around  8-10bps  (2014:  -14bps)  due  to  a combination  of  yield  rebalancing  of  the  loan  portfolio  and  funding  cost  pressures.
Management expects the impact from the rebalancing of portfolio to taper off over the next three years. As for funding cost pressures, Public Bank said that this was due to a combination of Basel III liquidity standards (more aggressive competition for stable, retail  deposits),  as  well  as  slower  industry  deposit  growth,  which  has  led  to  some banks operating at or close to their loans-to-deposit ratio (LDR) ceilings.No  red  flags  on  asset  quality.  Management  has  not  noticed  any  red  flags  with respect to asset quality and guided for 2015 credit cost of <20bps.

Risks
The  risks  include:  i)  slower-than-expected  loans  growth;  ii)  weaker-than-expected NIMs; and iii) a deterioration in asset quality.

Forecasts
We  raise  our  2015-16  net  profit  projections  by  1-2%,  reflecting  some  minor housekeeping post the 2014 results. We also introduce our 2017F numbers.

Valuation and recommendation
We upgrade our recommendation on Public Bank to BUY from Neutral with a revised GGM-derived TP of MYR21.00 from MYR20.60.  The TP revision reflects the revision to our 2015 forecast above, as well as an update in the 2014 (base) book value.  Our GGM assumes: i)  8.8% COE; ii)  16% ROE; iii) 4.5% long -term growth; and iv) 2015F BVPS  of  MYR7.91  (previously  MYR7.78)  Our  T  implies  2.66x  2015F  P/BV,  a discount  to the  3.2x  10-year  average. We  believe  the  discount is  fair  as  the  group moves to a period of lower ROEs on more stringent capital requirements. Amid  an  uncertain  and  volatile  macro  environment,  we  believ  Public  Bank  offers investors a safe hideout.  We like the group for its good earnings predictability  (less reliant on markets-related income, etc), sound asset quality  and  cost efficiency. Post last year’s rights issue, the group is now one of the better domestic capitalised banks.

Finally, its book value has remained relatively resilient during times of adverse bond yield and forex movements, thus preserving  its  book value growth  and  the  ability to continue creating shareholder value.