Review

• PBB’s 9MFY19 results came within expectations. YTD net profit of RM4,106mn accounted for around 72% and 74% of ours and consensus full year estimates respectively. ROE stood at 13.3% (FY18: 14.8%), still within reach of management’s FY19 KPI target of 13-14%.

• Accounting for some 74% of our full year forecast, 9MFY19 total operating income broadened by 0.2% QoQ and 1.5% YoY as stronger non-interest income and contributions from Islamic Banking operations were muted by softer net interest income (NII).

• That said, while NII improved by 2.4% QoQ due to stable net interest margin (NIM) sequentially, it fell by 0.5% YoY. Annualised domestic and loan for the entire group softened to a growth of 4.4% and 4.2% YoY, in line with management’s loan growth target of 4-5% YoY for FY19. PBB’s domestic loans market share stood at 17.4%, a slight 20 bps improvement from 17.2% in 2018.

• Compared to a year ago, NII was mostly dampened by weaker net interest margin (NIM), which has declined by some 7 bps YTD. 9MFY19 NIM stood at 2.15% vs. 2.22% in 2018. QoQ, NIM stabilised - after falling by 7% in 2QFY19, as effects from the repricing of funding costs post the OPR cut in May gather pace and positive impact from a higher LD ratio.

• PBB’s annualised total and domestic deposits eased, rising at more modest pace of 3.4% and 3.2% respectively. PBB’s market share in the customer deposit space slipped to 16.2% from 16.4% in 2QFY19. Nevertheless, liquidity buffers remained stable with gross loan to fund ratio of around 89.5% (FY18: 88.4%).

• 9MFY19 non-interest income (non-NII) also came within expectations. Although non-NII declined by 11.3% QoQ, YTD non-NII rose 5.8% YoY. Offsetting lower fee income from unit trust (-4.3% YoY) and stockbroking (-14.8% YoY), loan related fee and commission income grew by 3.4%. Non-NII was also boosted by net gains on financial instruments amounting to RM133.8mn (+RM90.3mn YoY).

• Meanwhile, Net Asset Value of Funds (NAV) under management slipped to RM84.2bn vs. RM84.4bn in the previous quarter (FY18: RM78.7bn). Over in the bancassurance business, 9MFY19 annualized new premium (ANP) stood at RM208.2mn (FY18: RM268.9mn).

• By segment, 9MFY19 PBT contribution from overseas operations remained robust (+14.4% YoY). Overseas operations accounted for some 11% of the group’s PBT. Treasury operations and Investment banking saw weaker PBT of -56.8% YoY and -35.7% YoY. PBT also contracted for Fund management (-5.0% YoY).

• On a positive note, PBT for hire purchase rebounded, rising 4.1% YoY vs. a contraction of 2.7% YoY registered in the previous quarter. Elsewhere, Retail operations (comprising individuals and SMEs), which accounts for almost 51% of PBT, stood little changed at RM2,734mn vs. a year ago due to competition and overall weakened sentiments. Other segments which reported stronger YoY PBT include corporate lending (+18.2% YoY).

• 3QFY19 allowance for impairment on loans and other assets softened to RM45.8mn vs. RM66.1mn in 2QFY19. YTD, total allowances stood at RM109.0mn vs. RM136.8mn in 9MFY18. Upholding healthy asset quality, the gross impaired loans ratio (GIL) stayed pat at 0.5% (Dec 2018: 0.5%) while loan loss coverage stood at 117.6% (Dec 2018: 126.0%). The GIL for key segments namely residential financing (0.5%) and transport vehicles (0.5%) were stable. Meanwhile, the GIL for commercial properties improved by 10 bps QoQ to 0.3%.

• PBB remains backed by solid capital position with Common Equity Tier 1 (CET1) Capital Ratio, Tier 1 Capital Ratio and Total Capital Ratio of 13.1%, 13.5% and 16.5% respectively.

Impact

• Tweaking our: 1) loan growth assumption to 4% from 5%, and 2) NIM assumption lower by another 3 bps for FY19 slightly lower in tandem with weaker NII – but keeping our FY20 and FY21 assumptions largely unchanged for now, we adjusted our FY19 net profit forecast to RM5,589mn from RM5,728mn but maintained FY20 and FY21 profit forecasts at RM5,913mn and RM6,235mn.

Outlook

• Maintaining FY19 key performance benchmarks, management continues to guide for modest growth targets due to the challenging macro environment. To recap, in the previous briefing, loan growth is guided to soften to a range of 4-5% (vs. an initial target of 5.0% in FY19). Nevertheless, growth can be supported by healthy outstanding pipeline of loans along with higher loan approval rates in recent quarters.

• We maintain our view that the impact from the challenging operating environment will continue to put pressure on topline, as the growth momentum continues to ease. Adding to the squeeze, competition in key loan segments such as residential mortgages and HP remain robust. NIM is also expected to remain under pressure due to competition.

Valuation

• Deriving an implied PBV of 1.57x based on the Gordon Growth Model, we maintain PBB’s TP at RM19.20. With that, we reiterate our SELL recommendation on PBB.

• Key upside/downside risks to PBB’s TP include: 1) stronger-than-expected contributions from operations overseas, 2) healthier demand for bancassurance and wealth management products, 3) unexpected increase in unemployment rate resulting in high default rates among retail borrowers and its exposure to the commercial property space, and 4) further outflow of foreign funds resulting in a sharp decline in the foreign shareholding level.

Source: TA Research - 8 Nov 2019