• Maintain NEUTRAL and MYR5.00 TP, 8% upside. Public Bank’s 1H22 results met expectations. The bank is on track to achieving its 12% ROE target with improved NIM outlook and lower credit cost cushioning the weakness in non-interest income. Share price is up 11% YTD, helped by its defensive attributes against a backdrop of rising economic uncertainty. With no new catalysts for a positive re-rating, the stock risk-reward ratio is well balanced, at 1.8x FY22F P/BV, in our view.

• 1H22 results in line. 2Q22 net profit of MYR1,417m (+1% QoQ, +2% YoY) took 1H22 earnings to MYR2,914m (-3% YoY), accounting for 50% and 48% our and Street FY22F earnings. Reported ROAE of 12% is tracking management’s 11-12% target. CET-1 ratio is solid at 14.6%. An interim dividend of 8 sen (1H21: 7.5 sen) was declared, with a payout ratio of 55.2% (see Figure 1 for analysis of its 1H22 performance).

• Key trends in 2Q22. Pretax profit ticked up 1% QoQ as lower allowances offset the 4% QoQ drop in PIOP. Net interest income was +5% QoQ, lifted by NIM expansion (+5bps QoQ to 2.29%) and loans +1.4% QoQ. Non-II fell a sharp 15% QoQ – fee income down 12% QoQ impacted by the weak capital markets, and FX gains dropped 18% QoQ. Total impairment charges were -19% QoQ to MYR82.5m, lowering loan credit cost to 10bps in 1H22 (1H21: 34bps).

• Loan and deposit targets maintained. Management sees the balance of risks tilted towards the upside due to rising inflation and headwinds from global economies. With the bank remaining prudent in its lending, FY22 loan growth target is kept at 5.0% despite growth of 2.8% YTD June (annualised: 5.6%) in 1H22. Deposit growth target is also maintained at 5% vs 2.1% YTD June (annualised: 4.1%).

• NIM to improve 8-10bps in FY22. Based on expectations of a 75bps rise in the overnight policy rate (OPR) in 2022 (from 50bps), management now expects NIM to reach 2.37% in 4Q22, and expand by 8-10bps in FY22F.

• Credit cost guidance lowered. GILs ticked up a modest 0.5% QoQ with higher working capital GILs offsetting declines in consumer GILs. GIL ratio was stable QoQ at 0.29% (4Q21: 0.31%) and LLC was a higher 388.8% (1Q22: 382.5%; 4Q21: 361%). Loans under repayment assistance (LURA) was MYR20.8bn or 6% of its Malaysia loans (Dec 2021: MYR26.9bn or 8%), with 5% of LURA overdue by >1 month. With improved visibility on LURA, management lowered its FY22F credit cost guidance to 10-15bps from <20bps. The bank’s forward looking provisions were unchanged at c.MYR1.7bn at end-Jun 2022.

• Earnings and TP. Taking into account assumptions of better NIM and lower credit cost, that would offset cuts in non-II, our FY23F-24F net profit is upgraded by 3-4% (Figure 3). Our TP unchanged at MYR5.00 is based on an intrinsic value of MYR5.02 and 0% ESG premium/discount, based on our in- house methodology (Figure 4).

Source: RHB Research - 30 Aug 2022