• NEUTRAL, new MYR4.40 TP from MYR4.25, 6% upside with c.5% FY23F yield. Public Bank’s 2Q23 results are in line. Operating income softened sequentially on NIM slippage and softer non-II while loan impairments ticked up, leading to the 6% drop in headline net profit. Otherwise, it remains well on track to meet FY23 targets, which were unchanged. While NIM appears to be bottoming out and ample provision buffers remain intact to cushion against GIL upticks, we think these have largely been priced in. For the longer term, we prefer banks with larger overseas exposure.

• 2Q23 net profit contracted by 6% QoQ (+14 % YoY) to MYR1.6bn, bringing 1H23 net profit to MYR3.3bn (+18% YoY), which comprises c.49-50% of our and Street FY23F earnings. 2Q23 PIOP dropped 4% QoQ (flat YoY), in tandem with the 3% decline in operating income. NII eased 2% QoQ due to a 8bps NIM squeeze while Non-II dropped 6% QoQ on lower trading gains and mark-to market (MTM) losses on the trading book. Credit cost was also higher at 3bps (1Q23: negligible), which further dampened its bottomline. Reported 1H23 ROE of 13.2% was tracking ahead of management’s 12-13% target while CET- 1 remains strong at 14.7% (1Q23: 14.6%). As expected, an interim DPS of 9 sen was declared, at a payout ratio of 52% (1H22: 8 sen, 55.2% payout ratio).

• NIM slipped 8bps QoQ (-11bps YoY) as we estimate the rise in average funding cost (of 18bps) from the ongoing repricing in fixed deposits outpaced the 10bps increase in average asset yield. More importantly, this sequential slippage is materially lower than the 32bps QoQ compression in 1Q23. 1H23 NIM of 2.22% was 17bps lower vs 2022’s 2.39%, in line with the <20bps NIM compression PBB guided. Looking ahead to 2H, management expects NIM to stabilise with potentially some improvement towards 4Q – mainly as the earlier high cost, promotional rate fixed deposits are rolled off the books and/or repriced lower. While deposit competition remains intense, current promotional rates are still lower than 4Q22/1Q23 levels.

• Loans and deposit targets kept. At a 5% annualised loan growth, this outpaced the banking system’s 3% growth thanks to steady expansion from its retail-centric portfolio. Deposits were up 6% (annualised), led by fixed deposits (+11% annualised) while CASA deposits were flat YTD. As such, PBB’s CASA ratio eased slightly to 29% from 30% at end-2022. 2023 loan and deposit growth guidance were retained at 4-5%.

• Impaired loans rose further, but well covered. GILs rose a further 9% QoQ mainly due to the auto, residential mortgages and personal segments. GIL ratio remains low at 0.55% (domestic GIL ratio: 0.37%) but LLC fell to 199% vs 1Q23: 218%. Overlays were stable at MYR1.8bn. Repayment and delinquency trends have held up but, due to an uncertain macroeconomic environment, PBB said that the potential overlay writebacks in 2H23 is not expected to be significant.

• Earnings forecasts unchanged but TP rises to MYR4.40 from MYR4.25 on a roll forward in valuations to end-2024. This includes a 4% ESG discount.

Source: RHB Securities Research - 30 Aug 2023