Review

• Public Bank (PBB) reported an 18.4% YoY increase in 1H23 net profit. 1H PBT rose 7% YoY. Results came within expectations. YTD net profit stood at RM3,333mn, accounting for around 49% of ours and consensus full-year estimates. Annualised ROE stood at 13.2% (FY22: 12.8%).

• PBB declared a first interim dividend of 9.0 sen per share (1H22: 8.0 sen per share), representing a payout of 52.4%.

• Making up around 47% of our full-year forecast, the 6M total income increased by 3% YoY (-2.8% QoQ) – as increases in the net interest income (NII) and non-net interest income (non-NII) more than offset lower contributions from Islamic Banking operations (-3.0% YoY, -0.4% QoQ).

• 1H23 NII expanded by 3.4% YoY (-2.2% QoQ), backed by loans that grew at a stronger annualised pace of 5.4% YoY (FY22: +5.3% YoY). Domestic loans rose by 5.0% (FY22: +5.2% YoY). PBB’s market share in the domestic market remained steady at around 17.5%. By segment, loans and advances were supported by residential properties (+6.1% YoY) and hire purchases (+11.0% YoY). Financing for commercial properties widened by 2.3%, while financing for domestic SMEs increased by 1.5% YoY.

• The QoQ decline in NII was mostly attributed to further moderation in NIM. 2Q NIM declined to 2.18% in 2Q23 vs 2.26% in 1Q23 and 2.29% a year ago. YTD NIM stood at 2.22%, falling from 2.39% in 2022. Elsewhere, PBB’s total deposits broadened at a healthy annualised pace of 6.0% (FY22: +3.8% YoY), driven by Fixed Deposit growth of 12.1%. Combined, Savings and Demand Deposits contracted by 0.4% YoY. PBB’s market share in the customer deposit space climbed slightly to 16.5% (FY22: 16.3%). Meanwhile, liquidity remains ample, with the liquidity coverage ratio (LCR) at 134.4% (FY22: 127.7%).

• 1H23 non-NII expanded by 5.4% YoY but fell by 6.4% QoQ. The yearly improvement was attributed to higher income from foreign exchange (+94.9% YoY) and stockbroking businesses. Meanwhile, PBB registered lower net gains on financial instruments amounting to RM31.4mn vs. RM51.0mn in 1H22. Net fee and commission remain contracted, falling by 1.9% YoY due to lower unit trust income (-4.1% YoY) but cushioned by a 16.8% increase in stockbroking income. On the Wealth Management business, PBB’s Net Asset Value of Funds (NAV) under management broadened slightly to RM96.0bn (FY22: RM91.8bn) YTD. Over in the bancassurance business, 1H23 annualised new premium (ANP) stood at RM210.8mn (FY22: RM406.7mn).

• 1H23 loan loss allowances improved to RM25.7mn (vs RM179.6mn in 1H22). PBB’s credit cost strengthened to 1 bp compared to 10 bps in FY22. Management expects asset quality to remain sound. Nevertheless, PBB intends to maintain a prudent provisions buffer, resulting in a healthy loan loss coverage ratio of 199.1% (FY22: 272.0%).

• Elsewhere, the total gross impaired loans rose to RM2,148mn vs. RM1,584mn in 2022, the bulk of which was attributed to a corporate account in Hong Kong. With that, the gross impaired loans ratio (GIL) rose YoY to 0.55% from 0.42% in 2022, underpinned by 7 bps YTD increase in the GIL for residential properties. The GIL ratio for commercial properties and transport vehicles also deteriorated slightly by 1 bp YTD to 0.57% (FY22: 0.56%) and 0.26% (FY22: 0.25%).

• PBB remains backed by a solid capital position with a Common Equity Tier 1 (CET1) Capital Ratio and Total Capital Ratio of 14.7% and 17.6%, respectively.

Impact

• No change to our earnings estimates.

Outlook

• Maintaining modest FY23 targets due to challenges from rising interest rates and inflation, management projects loan growth of 4-5% (FY22: 5.3%). The mortgages, HP and SME segments will continue to support lending activities. Deposits are envisaged to rise in tandem with loans. As the interest rate upcycle eases, management foresees normalisation in NIM in 2023. With the presence of deposit competition, management predicts a potential double-digit margin compression of <20 bps in 2023. In terms of asset quality, management maintains that credit costs should stay at around 10 bps in 2023 (vs FY22: 10 bps) on the back of a stable repayment trend and delinquency trend. Taken together, management anticipates that FY23 ROE, which is guided to come in at around 12-13% (FY22: 12.4%), would be supported by continued expansion in loans and deposits as well as stable asset quality.

Valuation

• We lowered the sector’s market risk premium assumption to 6.0% from 6.5% on the back of an improved domestic political climate. As such, we raised PBB’s TP to RM4.30 from RM3.90. Our valuation is based on an implied PBV of c. 1.47x based on the Gordon Growth Model. Hold reiterated on PBB.

Source: TA Research - 30 Aug 2023