• Downgrade to NEUTRAL from Buy, new MYR4.50 TP from MYR5, 9% upside with c.5% FY23F yield. Amid an uncertain macroeconomic environment, coupled with lacklustre earnings prospects in the near term due to NIM pressures, Public Bank’s share price performance could remain subdued. We consider the stock as defensive, and it should outperform if the macroeconomic environment deteriorates meaningfully – but this is not our base case scenario at the moment. Moreover, dividend yields, while decent, still lag behind that of peers (highest dividend yielders offer c.7%).

• Watch out for “catch-down” in near-term NIMs. Recall that its 4Q22 results were a slight beat as NIM (+16bps QoQ) proved surprisingly strong. We believe this was achieved by Public Bank managing its deposit mix (fixed deposits were down 1% QoQ, and we note a shift in mix to shorter- term maturities) and costs well. That said, we expect a “catch-up” in funding cost, due to, among others: i) The group rebuilding its longer-term fixed deposits; ii) normalisation in the CASA mix (4Q22: 29.9% vs pre-COVID-19 average of 25%), and iii) ongoing competitive pressures. As such, we think the NIM compression, especially in 1H23, could be more severe as compared to peers. We projected FY23F NIM compression of 11bps for the group, which we have left unchanged for now. This is higher than the mid- single digit decline in NIM that we forecasted for its big-cap peers.

• Amid lingering macroeconomic uncertainties and volatilities, we increase our COE assumption to 9.0% from 8.5%. Consequently, our TP drops to MYR4.50 from MYR5. Our new TP is based on an intrinsic value of MYR4.55, with a ESG premium/discount of 0% applied as per our in- house proprietary methodology – Public Bank’s ESG score of 3 out of 4 is on par with our country median. Our intrinsic value is based on a GGM- derived P/BV of 1.63x, which is a little below -1SD from the historical mean. This report marks the transfer of coverage on this stock to David Chong.

Source: RHB Research - 9 Mar 2023