Review

• Public Bank (PBB) reported a 3.5% YoY decrease in 1QFY24 net profit to RM1,653mn due to higher overhead expenses. Despite that, the results came within expectations, with the YTD net profit accounting for around 24% of our full-year estimates. Annualised ROE stood at 12.3% (FY23: 13.0%).

• Making up around 24% of our full-year forecast, 1QFY24 total income increased by 2.3% YoY (+3.7% QoQ) anchored by improvements in the net interest income (NII) (+2.6% YoY), Islamic Banking operations (+4.1% YoY) and a 0.5% YoY increase in non-net interest income (non-NII).

• 1QFY24 NII recovered on the back of stronger annualised loan growth of 6.3% (FY23: +5.9% YoY). Domestic loans rose at a stronger pace of 5.9% (FY23: +5.9% YoY) vis-à-vis the industry’s annualised increase of 5.3%. PBB’s market share in the domestic market remained steady at 17.5%. By segment, loans and advances were supported by hire purchases (+17.3% YoY), while the financing for residential properties had softened slightly to 5.6% (FY23: +6.4% YoY). Financing for commercial properties widened by a more robust 4.0% while financing for domestic SMEs also increased at a more robust pace of 5.4% YoY.

• 1QFY24 NIM showed signs of stabilisation (+6 bps QoQ) after registering severe NIM compression in FY23 to 2.20% from 2.39% in FY22 due to funding pressures. Management attribute the steadier NIM of 2.21% in 1QFY24 to proactive management of cost of funds. Elsewhere, PBB’s total deposits also broadened at a stronger pace of 7.1% (FY23: +4.6% YoY), driven by Fixed Deposits, which widened by 25.1% while Savings and Demand Deposits grew at an annualised pace of 3.7% YoY. Meanwhile, the Money Market Deposit slipped by 9.7% YoY, after rising by 19.8% in FY23. PBB’s market share in the customer deposit space also held steady at 16.3% (FY23: 16.3%). Elsewhere, liquidity remains ample, with the liquidity coverage ratio (LCR) at 136.5% (FY23: 136.8%).

• 1QFY24 non-NII expanded by 7.9% QoQ and 0.5% YoY. The sequential improvement was attributed to higher net gains on financial instruments amounting to RM15.1mn vs. RM12.1mn in 4QFY23. Net fees and commissions strengthened further, rising by 9.6% QoQ due to higher income from the sale of unit trust (+13.4% QoQ) and Stockbroking income (+53.2% QoQ). Yearly, Fee income rose by 10.8% YoY due to Unit Trust income (+19.3% YoY) and a recovery in the fee and commission income (+2.5% YoY). The stronger fee income helped support lower net gains and losses on financial instruments (-66.4% YoY) and a 16.2% decline in other operating income (comprising Forex income and others). In the Wealth Management business, PBB’s Net Asset Value of Funds (NAV) under management rose to RM100.4bn (FY23: RM97.1bn). Over in the bancassurance business, 1QFY24 annualised newPremium (ANP) Stood at RM108.1mn (FY23: RM439.3mn).
   
• 1QFY24 loan loss allowances improved QoQ but rose on a YoY basis to RM63.4mn. PBB’s credit cost rose slightly to 6 bps compared to 4 bps in FY23. Overall, management expects asset quality to remain sound, with a healthy loan loss coverage ratio of 168.7% (FY23: 181.8%).
   
• Elsewhere, the total gross impaired loans rose to RM2,512mn vs. RM2,335mn in 2023. With that, the gross impaired loans ratio (GIL) rose YoY to 0.62% from 0.59% in 2023. Domestically, the GIL for residential properties climbed to 0.37% from 0.33% in FY23. The GIL ratio for commercial properties also deteriorated slightly by 4 bps YTD to 0.66% (FY23: 0.62%), while the GIL ratio for transport vehicles improved to 0.21% (FY23: 0.26%).

• 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

• Management is maintaining modest targets for FY24, taking into account prevailing macroeconomic challenges such as the rising cost of living, which may continue to impact sentiments. Consequently, management anticipates achieving a loan growth of approximately 5-6%. This growth will be supported by the launch of several special campaigns offering competitive financing terms and pricing to strengthen market position, as well as opportunities arising from the increasing demand for green financing. Deposits are expected to grow in tandem with loans, thanks to PBB’s robust deposit franchise and ongoing campaigns.

• Management forecasts that the NIM will remain stable in 2024, with a potential slight mid-single digit compression due to intensified competition for deposits and loans. In terms of asset quality, management is confident that credit costs will range between 5-10 basis points, citing consistent repayment patterns and a stable delinquency trend. Additionally, management mentioned the possibility of gradually writing back pre-emptive provisions when appropriate.

• Overall, FY24 ROE is projected to be around 12%, a decrease from the previous year's 13%. This projection is supported by ongoing expansion in loans and deposits and a commitment to maintaining sound asset quality. However, potential downside risks include NIM compression, weaker than expected global growth, and inflationary pressures.

Valuation

• Rolling valuations forward to FY25, we raised PBB’s TP from RM4.70 to RM4.90. Our valuation is based on an implied PBV of c. 1.53x based on the Gordon Growth Model. Buy reiterated on PBB.

Source: TA Research - 21 May 2024