Review

• 1QFY17 results came within expectations. Representing a 1.5% YoY increase, PBB reported net profit of RM1.25bn. PBB’s bottomline accounted for 24% of ours and consensus full year estimates respectively. ROE decreased to 14.9% from 16.5% in Dec 2016.

• Total operating income broadened by 1% QoQ and 3.3% YoY. Despite that, PBT dipped on both a QoQ and YoY basis, underpinned by the steep increase in operating expenses (+10.1% QoQ, +12.5% YoY). Net profit declined 15.8% QoQ on the back of normalization of loan allowances, vs. net writeback of RM37.3mn reported in 4Q FY16.

• Net interet income (NII) expanded at a decent pace of 1.3% QoQ and 8.3% YoY. Domestic loans accelerated at an annualized pace of 4.7%. Loan growth for the entire group increased at a softer pace of 3.6%. PBB’s domestic loans market share stood unchanged QoQ at 17.7%, but increased 30 bps from 17.4% in 2015.

• Stronger sequential net interest margin (NIM) gave boost to PBB’s 1Q NII. Jumping to 2.31% from 2.22% in the previous quarter, NIM broadened on the back of: 1) stable loan yields, 2) increase in core deposits, 3) some impact from repricing of matured deposits in tandem with the OPR cut in July, and 4) slight contraction of costly wholesale deposits during the quarter. From a year ago, NIM widened by 11 bps to 2.20%.

• PBB’s total and domestic deposits expanded at 8.1% and 7.9% YoY. PBB’s market share in the customer deposit space, stood at 16.6% (from 16.9% in FY16). Amid stronger deposit growth, the group’s net loan to deposit (LD) ratio softened to 93.3% (FY16: 94.3%).

• Non-interest income (non-NII) contracted by 2.7% QoQ and 13.1% YoY. The decline was underpinned by softer forex income (-46.0% YoY) and investment income (to RM4.0mn from RM40.9mn a year ago). Stable fee and commission income, along with the pickup (+11.6% YoY) in unit trust income helped cushion the decline in non-NII. Both these segments accounted for 41% and 33% of total non-NII. Total Net Asset Value of Funds (NAV) under management widened to RM74.4mn (FY16: RM70.3mn) while annualized new premium (ANP) in the banca business stood at RM64.6mn – representing 27% of total ANP of RM239.2mn reported in FY16.

• By segment, PBB’s overseas operations registered PBT growth of 3.5% YoY. Overseas operations accounted for some 10% of the group’s loan portfolio. Treasury operations and Investment banking saw weaker PBT of -21.8% YoY and -24.7% YoY. Elsewhere, Retail operations (comprising individuals and SMEs), which accounts for 52% of total segment profits increased by 2.6% while HP climbed 13.4% YoY. Growths were also observed in the Fund management (+11.2% YoY) and Corporate lending (+11.2% YoY) segments.

• Asset quality remained solid with total allowances rising by only marginal 0.8% YoY. Compared to the net writeback recorded in the previous quarter, PBB reported total allowances of RM67.5mn in 1QFY17. Nevertheless, the gross impaired loans ratio (GIL) stayed pat at 0.5% (Dec 2016: 0.5%) while the loan loss coverage strengthened to 104.0% (Dec 2016: 102.7%). On that note, PBB reported a slight 10 bps improvement 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.

Impact

• No change to our earnings estimates.

Outlook

• Going into 2017, we continue to foresee banks remaining cautious amid the challenging macro environment and concerns over rising geopolication tensions. Nevertheless, the domestic economy remains resilient and fuel growth for the sector. Potential increase in the OPR may give an added boost to earnings. Excluding a hike, management had earlier noted that loan yields should remain stable. Nevertheless, competition for deposits will prevail in 2017. Additionally, asset quality could weaken as management noted that collection efforts has had to be intensified. Rising cost of living could add further strains to repayment capabilities. Taken together, management had conservatively guided for a lower FY17 ROE target of between 14% and 15%.

Valuation

• We maintain PBB’s TP at RM22.10. This values the stock at an implied FY17e PBV of 2.3x. We reiterate our BUY recommendation on PBB.

• 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 - 21 Apr 2017