• Maintain NEUTRAL and MYR4.80 TP, 6% upside with 5% FY25F yield. Public Bank's Hong Kong-listed subsidiary Public Financial Holdings (626 HK, NR) issued a profit warning on 23 Dec. It expects to incur a net loss of HKD800m-1.1bn (c. MYR460-640m) for FY24, mainly on account of goodwill impairment of HKD600-900m (MYR350-520m). Excluding this, Public Financial expects to report a loss of HKD190m (MYR110m) vs a loss of HKD34m in 1H24 and earnings of HKD14m in 2023. We expect investors to look past the goodwill impairment and continue to focus on the underlying operations instead.
• Goodwill impairments... The goodwill in Public Financial's books stood at HKD2.77bn as at June and arose from the acquisition of Public Bank (Hong Kong) back in 2006. It cited expectations of challenging operating environment and market conditions in the near- to mid-term as reasons for the goodwill impairment. At Public Bank group level, Hong Kong operations account for 65% of total goodwill.
• ...and higher credit losses dampen Hong Kong results. On a core basis, Public Financial's expectations of a net loss this year is mainly on account of higher expected loan impairments of HKD494m (+52% YoY) for FY24 vs HKD324m in FY23 (1H24: HKD164m charge). It pointed to the decline in collateral value and increased delinquencies from hire purchase loans and additional provisions for corporate loans. Aside from that, other contributing factors mentioned were wider fair value losses on investment properties (HKD50m) and escalation in opex due to higher staff costs.
• Tough going for Hong Kong operations in the past two years, with higher loan impairments and NIMs squeeze (higher funding costs from the rates cycle) adversely impacting the 2023 and 1H24 results. By comparison, Public Financial had reported a PATMI of HKD466-510m for 2017-2019. On the flipside, we note that asset quality may be stabilising (GIL ratio was broadly stable in 1H24 vs 2023's 3.7%), while gross loans rose by an annualised pace of 3% after having posted annual declines since 2019.
• Impact to group. Public Financial's expected core net loss of HKD190m is not significant at group level, ie 1-2% of 2024F PATMI. The goodwill impairment, however, makes up 4-5% of 2024F PATMI. The above, however, could be further mitigated by ongoing management overlay reversals, where the group is still sitting on overlay stock of MYR1.5bn, coupled with the maiden inclusion of LPI Capital (LPI MK, NR) in 4Q24. Also, the impact from the goodwill impairment is capital neutral in our view, as goodwill is already deducted in the computation of regulatory capital. Lastly, while the impact to shareholders' equity is immaterial, the impairment could provide a minor 5-10bps uplift to ROE going forward.
• Retaining forecasts and TP for now. Our MYR4.80 TP is based on a GGM-derived P/BV of 1.5x. It also includes a 2% ESG premium.

Source: RHB Research - 26 Dec 2024