• Upgrade to BUY from Neutral, MYR5 TP offers 17% upside with c.4% FY23F yield. The possibility of changes in major shareholding at Public Bank following the demise of its founder may limit its share price rerating. Still, at 1.5x FY23 P/BV against 13.5% ROE, its valuation is compelling in our view. This is especially so, given projected earnings growth of 19% for FY23F and the huge provision buffers that can be released. Our TP is based on a GGM- derived P/BV of 1.8x, which is slightly above -1SD from the historical mean.

• Business as usual. PBB’s share price, which perked up on the release of healthy 3Q22 results in late Nov 2022, has since retreated c.3%, weighed in part by the passing of the bank’s founder Tan Sri Teh Hong Piow on 12 Dec. While the market is awash with questions and speculation over the founder’s 23.4% stake in PBB, it is business as usual for the banking group under the leadership of the group managing director/CEO Tan Sri Tay Ah Lek and the management team. Tay assumed his current position back in 2002.

• Improved funding profile positive on NIM. PBB’s NIM grew 13bps QoQ to 2.42% in 3Q22 – one of the strongest among listed peers. Management attributed gains of 7-8bps to the cumulative 75bps rise in the Overnight Policy Rate (OPR) between May-September, with the balance coming from the bank’s improved funding structure. PBB’s low-cost CASA deposits have increased to 30.7% of customer deposits in 3Q22 from 25% in 4Q19, leading to higher NIM sensitivity – a 5bps margin expansion for every 25bps OPR hike vs 3bps previously. Although expecting only one more rate hike in 1Q23, management sees room for further NIM expansion in 2023, given the flow- through effect from the 100bps increase in 2022.

• Hefty provision buffers can keep credit cost low. PBB’s superior asset quality is widely acknowledged by investors and competitors. Still, it is worth pointing out that the bank’s GIL ratio of 0.33% at end-3Q22 is lower than pre- pandemic levels of 0.5% in 4Q18 and 4Q19. Conversely, loan loss coverage (LLC) excluding regulatory reserves has risen to 339.5% vs 124-126% over the same period. The outstanding asset quality ratios are a testament to PBB’s conservative management style. Should LLC be lowered to 125%, this works out to the provision reversals of MYR2.68bn or 73bps in credit cost. This is significant, given its normalised credit cost of c.8bps a year.

• Mid-single digit loan growth in FY23. We see management remaining cautious on its lending business, given the uncertainty in global growth and prolonged political tensions. We expect loan growth to remain moderate at 5% YoY in FY23, sustained vs the 4.7% projected for FY22.

• Earnings and TP. We upgrade our net profit by 3% for FY22F and 4% for FY23F-24F on assumptions of lower credit cost, better NIM, and slightly higher non-interest income (non-II) (Figure 1). Our new forecasts point to healthy earnings growth of 19% in FY23F vs the 5% increase in FY22F. Our MYR5 TP (unchanged) is based on an intrinsic value of MYR5.01 and a 0% ESG premium/discount, using our in-house methodology (Figure 2).

Source: RHB Research - 5 Jan 2023