TA Sector Research

Public Bank Berhad - Higher Interim Dividend

sectoranalyst
Publish date: Wed, 28 Aug 2024, 01:16 PM

Review

  • Public Bank (PBB) reported a 3.1% YoY increase in 1HFY24 net profit to RM3,435mn due to higher operating income. The results came within expectations, with the YTD net profit accounting for around 49% of our full-year estimates. Annualised ROE stood at 12.8% (FY23: 13.0%).
  • PBB declared a first interim dividend of 10.0 sen per share (1H23: 9.0 sen per share), representing a payout of 56.5%.
  • Making up around 49% of our full-year forecast, 1HFY24 total income increased at a stronger pace of 4.2% YoY (+0.9% QoQ) anchored by improvements in the net interest income (NII) (+3.7% YoY), Islamic Banking operations (+4.8% YoY) and a boost of 5.8% YoY in non-net interest income (non-NII).
  • 1HFY24 NII strengthened on the back of an annualised loan growth of 6.0% (FY23: +5.9% YoY). Domestic loans rose at a healthier pace of 5.9% (FY23: +5.9% YoY) vis-à-vis the industry’s annualised increase of 5.0%. PBB’s domestic market share remained steady at 17.5%. By segment, loans and advances were supported by hire purchases (+14.8% YoY), while the financing for residential properties had softened slightly to 5.0% (FY23: +6.4% YoY). Financing for commercial properties widened by a more robust 4.0%, while financing for domestic SMEs increased by 4.1% YoY.
  • 1HFY24 NIM of 2.2% showed stabilisation (FY23: 2.2%). Management attributes the steadier YTD NIM to effective management of loan portfolio and funding costs. Elsewhere, PBB’s total deposits also broadened by 5.8% (FY23: +4.6% YoY), where Savings and Demand Deposits grew at an annualised pace of 4.0% and 2.2%, respectively. Meanwhile, the Money Market Deposit slipped at an annualised pace of 12.2%, cushioning the impact of a 16.7% rise in Fixed Deposits. PBB’s market share in the customer deposit space improved slightly to 16.5% (FY23: 16.3%). Elsewhere, liquidity remains ample, with the liquidity coverage ratio (LCR) at 138.5% (FY23: 136.8%).
  • 1HFY24 non-NII expanded by 3.9% QoQ and 5.8% YoY. The sequential improvement was attributed to higher net gains on financial instruments amounting to RM58.2mn vs. RM31.4mn in 1HFY23. Net fees and commissions also strengthened, rising by 1.3% QoQ and 12.0% YoY. Yearly, the increase was due to higher income from the sale of unit trusts (+16.3% YoY) and Stockbroking income (+44.6% YoY). The stronger fee income helped support lower Forex income (- 26.3% YoY) and a 28.3% decline in other operating income. In the Wealth Management business, PBB’s Net Asset Value of Funds (NAV) under management rose to RM102.8bn (FY23: RM97.1bn), accounting for a retail market share of 35.7%. Over in the bancassurance business, 1HFY24 annualised new premium (ANP) stood at RM240.4mn (FY23: RM439.3mn).
  • 1HFY24 loan loss allowances rose to RM62.1mn vs RM25.7mn a year ago. However, QoQ, PBB reported a net writeback of RM1.3mn. With that, the YTD credit cost improved to 3 bps compared to 4 bps in FY23. Overall, management expects asset quality to remain sound, backed by a healthy loan loss coverage ratio of 154.2% (FY23: 181.8%).
  • Elsewhere, the gross impaired loans rose to RM2,623mn vs. RM2,335mn in 2023. Despite that, the gross impaired loans ratio (GIL) was little changed at around 0.6% (FY23: 0.59%). Domestically, the GIL for residential properties climbed to 0.4% from 0.3% in FY23. The GIL ratio for commercial properties also deteriorated slightly to 0.8% (FY23: 0.6%), while the GIL ratio for transport vehicles improved to 0.2% (FY23: 0.3%).
  • 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. 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, albeit with a potential slight risk of mid-single digit compression due to ongoing 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.
  • On the back of a potentially better-than-anticipated NIM and strength in non-NII, management raised the FY24 ROE projection to >12.5% from 12%. This projection is supported by ongoing expansion in loans and deposits and a commitment to maintaining sound asset quality. However, potential downside risks include weaker than expected global growth, and inflationary pressures driving asset quality risks.

Valuation

  • We updated the beta and lowered our market risk premium from 6% to 5.5% for the banking sector on the back of the improving economic environment in Malaysia, the banking system’s healthy asset quality and capital ratios, stable interest rate environment and more positive investor sentiments. With that, we raise PBB’s TP from RM5.05 to RM5.36. Our valuation is based on an implied PBV of c. 1.64x based on the Gordon Growth Model and a 3% ESG premium. Buy maintained on PBB.

Source: TA Research - 28 Aug 2024

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