Review

• FY16 results came within expectations. Representing a 2.9% YoY increase, PBB reported net profit of RM5.21bn. PBB’s bottomline accounted for 103% and 105% of ours and consensus full year estimates. ROE eased to 16.5% from 17.8% in FY15. The increase in net profit was underpinned by healthy topline growth from net interest income (NII) and income from Islamic Banking operations.

• We believe the results showed some signs of easing due to the weak macro climate. While results have outperformed management’s 2016 ROE, total capital ratio, GIL and CTI ratio targets, loans and deposit growth fell slightly short of guidance.

• NII expanded at a decent pace of 8.5% YoY. Domestic loans accelerated at an annualized pace of 7.2% vs. 10.3% in FY15. Loan growth for the entire group also eased, increasing at a softer pace of 7.5% (vs. 11.6% in 2015). Amid even softer industry loans, PBB’s domestic loans market share climbed to 17.7%, an increase of 30 bps from 17.4% in 2015.

• Stronger sequential net interest margin (NIM) helped give some boost to the 4Q’s NII. Jumping to 2.22% from 2.17% in the previous quarter, NIM broadened on the back of stable loan yields, repricing of matured deposits in tandem with the OPR cut in July and contraction of costly wholesale deposits during the quarter. From a year ago, NIM widened by 4 bps to 2.19%.

• Despite the easing trend in the industry, PBB’s total and domestic deposits expanded at 2.9% and 1.8% YoY. PBB’s market share in the customer deposit space climbed to 16.7% (from 16.6% in FY15). The group’s net loan to deposit (LD) ratio increased to 94.3% (FY15: 90.3%).

• Non-interest income (non-NII) contracted by 10.5% YoY. The decline was underpinned by softer forex income (-23.1% YoY) and investment income (-68.7% YoY). Healthier fee and commission income, along with the slight pickup in unit trust income helped cushion the decline in non-NII. Both these segments accounted for 37% and 34% of total non-NII. Total Net Asset Value of Funds (NAV) under management widened to RM70.3mn (FY15: RM64.8mn) while annualized new premium (ANP) in the banca business stood at RM239.2mn – representing a healthy 26.4% YoY increase from total ANP of RM189.3mn reported in FY15.

• By segment, PBB’s overseas operations, in particular, Hong Kong and Cambodia, fueled profit expansion of 8.5% YoY. Overseas operations accounted for some 9% of the group’s loan portfolio. Investment banking also saw weaker profit YoY (-17.8% YoY). Elsewhere, retail operations (comprising individuals and SMEs), which accounts for 53% of total segment profits decreased by 4.3% while HP climbed 30.1% YoY. Growths were also observed in the fund management (+5.9% YoY), corporate lending (+18.0% YoY) and treasury operations (+13.5% YoY) segments.

• Compared to 3QFY16, PBT accelerated by 15% QoQ. The sequential improvement was premised on a combination of a 3.8% increase in total income, writeback on loan impairment allowances amounting to RM37.3mn (vs. an allowance of RM93.7mn in the previous quarter), along with softer operating expenses (-1.1% QoQ).
   
• Asset quality remained solid although we believe some signs of deterioration are appearing in the form of lower loan loss coverage, which has slipped to 102.7% (Dec 2015: 120.8%). The gross impaired loans ratio (GIL) had also risen marginally to 0.51% (Dec 2015: 0.49%). On that note, PBB reported a slight 10 bps uptick in GIL for residential financing. No increase in GIL were observed for other key segments namely transport vehicle financing (0.6%) and domestic SME financing (0.3%).
• PBB is backed by solid capital position with Common Equity Tier 1 (CET1) Capital Ratio, Tier 1 Capital Ratio and Total Capital Ratio of 11.4%, 12.2% and 15.2% respectively.

• The board has declared a second interim dividend of 32 sen. In addition to the first interim dividend of 26 sen, total DPS for FY16 amounts to 58 sen – an increase as compared to 56 sen in FY15. This translates to a dividend payout ratio of around 43%.

Impact

• Incorporating FY16 results, we tweaked our FY17 and FY18 net profit forecast to RM5,272.9mn and RM5,421.8mn from RM5,183.5mn and RM5,482.1mn previously. We predict stronger profit growth of 4.2% in FY19 to RMRM5,647.8mn.

Outlook

• Going into 2017, management remains cautious and believes the challenging macro environment will translate to more moderation ahead. With 2016 loans and deposit growth coming in short of management’s target, PBB has guiding for softer loans and deposit this year. Targeting a range of 6-7% growth for loans and 5-6% growth for deposits, we conservatively forecast PBB to grow its loans and deposits by 6% and 3% respectively in 2017.

• Meanwhile, management noted that while loan yields should remain stable, competition for deposits will prevail, thus leading to further margin compression in 2017. Additionally, asset quality could weaken as management noted that collection efforts has had to be intensified in recent months. Not pointing to any particular sector, PBB added that the weakness is broad based. We believe the recent steep increase in petrol price could add further strains in the coming months. Taken together, management guides for more downside risk to ROE, lowering the FY17 ROE target to between 14% and 15%.

Valuation

• We raise PBB’s TP to RM20.90 from RM20.30 on the back of our earnings revision. This values the stock at an implied FY17e PBV of 2.17x. We upgrade PBB from sell to HOLD.

• Key upside/downside risks to PBB’s TP include: 1) stronger-than-expected contributions from operations overseas, 2) higher contributions from the sale of bancassurance and wealth management, 3) unexpected increase in unemployment rate resulting in high default rates among retail borrowers, 4) cost and loan yield pressures resulting in further NIM compression, and 5) external risk factors due to uncertainties in the global market and potential outflow of foreign funds resulting in an sharp exit by foreign shareholders.

Source: TA Research - 3 Feb 2017