Review

• Public Bank (PBB) reported a 14.3% YoY increase in 9M23 net profit. 9M PBT rose by 2.6% YoY. Results came within expectations. YTD net profit stood at RM5,034mn, accounting for around 73% of ours and consensus full-year estimates. Annualised ROE stood at 13.1% (FY22: 12.8%).

• Making up around 72% of our full-year forecast, the 9M total income increased by 0.5% YoY (+3.3% 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 (-4.9% YoY, +3.9% QoQ).

• 9M23 NII expanded by 0.7% YoY (+3.4% QoQ), backed by loans that grew at a more robust annualised pace of 5.9% YoY (FY22: +5.3% YoY). Domestic loans rose by 5.7% (FY22: +5.2% YoY). PBB’s market share in the domestic market remained steady at around 17.6%. By segment, loans and advances were supported by residential properties (+6.4% YoY) and hire purchases (+10.8% YoY). Financing for commercial properties widened by 2.5% while financing for domestic SMEs increased by 1.5% YoY.

• 9M23 NIM compressed to 2.22% from 2.39% in FY22. Nevertheless, 3Q NIM expanded to 2.21% in 3Q23 vs 2.18% in 2Q23. Elsewhere, PBB’s total deposits broadened at an annualised pace of 4.7% (FY22: +3.8% YoY), driven by Fixed Deposit growth of 9.0%. Combined, Savings and Demand Deposits contracted by 1.1% YTD. 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 131.4% (FY22: 127.7%).

• 9M23 non-NII expanded by 3.4% YoY and 2.7% QoQ. The yearly improvement was attributed to higher income from foreign exchange (+29.5% YoY) and stockbroking businesses. Meanwhile, PBB registered lower net gains on financial instruments amounting to RM36.8mn vs. RM68.6mn in 9M22. Net fee and commission turned around, strengthening by 1.4% YoY due to higher fee and commission income (+0.8% YoY) and a 22.5% increase in stockbroking income, cushioning the decline in unit trust income (-0.3% YoY). On the Wealth Management business, PBB’s Net Asset Value of Funds (NAV) under management broadened slightly to RM95.0bn (FY22: RM91.8bn) YTD. Over in the bancassurance business, 9M23 annualised new premium (ANP) stood at RM313.4mn (FY22: RM406.7mn).

• 9M23 loan loss allowances improved to RM59.7mn (vs RM275.5mn in 9M22). PBB’s credit cost strengthened to 2 bps compared to 10 bps in FY22. Management expects asset quality to remain sound, with a healthy loan loss coverage ratio of 186.9% (FY22: 272.0%).

• Elsewhere, the total gross impaired loans rose to RM2,282mn 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 0.58% from 0.42% in 2022. Domestically, the GIL for residential properties climbed to 0.30% from 0.21% in FY22. The GIL ratio for commercial properties also deteriorated slightly by 6 bps YTD to 0.62% (FY22: 0.56%), while the GIL ratio for transport vehicles stood unchanged at 0.25% (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 14.5% and 17.4%, respectively.

Impact

• No change to our earnings estimates.

Outlook

• Maintaining modest FY23 targets due to challenges from rising interest rates and inflation, management expect loan growth to end at around 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 could come in better than the 10 bps guided earlier for 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

• Updating the latest beta assumption obtained from Bloomberg, we raised PBB’s TP from RM4.30 to RM4.50. Our valuation is based on an implied PBV of c. 1.53x based on the Gordon Growth Model. Hold reiterated on PBB.

Source: TA Research - 30 Nov 2023