Maintain BUY, with a revised GGM-based TP of MYR19.00 (from MYR21.00, 9% upside). Public Bank is our preferred pick to weather the asset quality cycle ahead as it ticks all the right boxes, eg best-in-class asset quality, high loan provision buffers. In addition, we like its good earnings predictability (eg less reliant on markets-related income), cost efficiency and ability to continue delivering book value growth.

Preferred pick to weather asset quality cycle. Public Bank is our preferred pick to weather the asset quality cycle ahead, due to its: i) retail-based loan book, ii) best-in-class asset quality (gross impaired loan ratio of 0.54%), and iii) high loan provision buffers, with the loan loss coverage at 129%. In addition, we stress tested the earnings of banks in our sector report, basing our scenarios largely around the global financial crisis (GFC) experience. Not surprisingly, Public Bank’s earnings appear to be more resilient under the various stress test scenarios.

Forecasts. We tone down our 2015F-2017F operating income by up to 2% and raise our 2016F/2017F credit cost assumptions to 20bps/20bps respectively from 18bps pa flat, to factor in weaker recoveries and potential asset quality issues. Overall, we reduce our 2015F/2016F/2017F net profit by 1%/4%/4%.

Investment case. We retain our BUY recommendation, with a lower GGM-derived TP of MYR19.00 (from MYR21.00) reflecting the earnings revisions above. We also update our GGM parameters and roll forward valuations to 2016. Our GGM assumes: i) a revised COE of 9.5% (previously 8.8%), reflecting the revision in our in-house market risk premium assumption and an update to the stock’s beta, ii) revised ROE assumption of 15.5% (from 16%), and iii) 4.5% long-term growth. Ouyear average. We believe the discount is fair, as the group moves to a period of lower ROEs on more stringent capital requirements. Public Bank remains our Top Pick for the sector, given its resilience to the credit cycle. In addition, we like the group for its good earnings predictability (eg less reliant on markets-related income), sound asset quality and cost efficiency.