Public Bank - Prospects Undeterred

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+1.10 (27.50%)

PBBANK’s 1QFY24 net profit (-4%) came in as expected where we anticipate stronger numbers to come in during the later half as better economic readings kick in. Retail demand for loans stay supportive with the group seemingly able to report small wins in NIM expansion, albeit still cautionary of sustained competition in the deposits front. Maintain OUTPERFORM and GGM-derived PBV TP of RM5.10. PBBANK is one of our 2QCY24 Top Picks.

Within expectations. PBBANK’s 1QFY24 net profit of RM1.65b came in within expectations, making up 23% of both our full-year forecast and consensus full-year estimates. No dividend was declared as the group typically makes biannual payments.

YoY, 1QFY24 net interest income gained 3% as although NIMs were marginally lower (2.20%, -2 bps), this was made up by its larger loans book (+6%). Meanwhile, non-interest income was flattish as better unit trust’s results were offset by lower investment and forex performances. Group cost- income ratio expanded to 35.4% (+2.3ppt) mainly on the back of higher personnel costs post-union wage and inflationary adjustments, while the 6 bps credit cost reported (from 0.2 bps) is normalised. Owing to these two higher expenditures, 1QFY24 net profit declined by 4% to RM1.65b.

QoQ, 1QFY24 net earnings improved by 2%, mostly due to recovering NIMs (+4 bps) but were also offset by the same abovementioned higher personnel cost.

Briefing highlights. While the group showed a slight decline to its YTD- earnings, the group opted to maintain its FY24 targets citing better prospects in subsequent periods.

1. 5%-6% loans growth remains intact with the support of sustained domestic demand and anticipated rebound in exports. PBBANK reported its strongest absolute gain in hire purchase which has seemingly enjoyed some seasonal strength. Mortgage markets are likely to stay afloat with better economic and income prosperity.

2. Deposits competition had eased with repricing opportunities emerging. That said, the competitive landscape is still relatively tight with asset yields likely to be pressed, maintaining the group’s guidance for a stable to mid-single digit compression on NIMs in FY24.

3. Overlay writebacks continue to be on the table albeit at a controlled and gradual manner, per the group’s latest reporting of RM1.8b. The group prefers to remain conservative with its buffers and may only take a stance in 2HFY24, were we opine certain inflationary threats may appear through targeted fuel subsidies and prolonged forex weakness.

4. While the group expected personnel cost to stay lofty, there are several ongoing initiatives to expand operational efficiency with further streamlining of processes. In the meantime, there may be no big ticket investments into technology which could undermine its ROE target of 12% for the year.

Forecasts. Post results, we tweak our FY24F/FY25F earnings by -1% from model updates.

Maintain OUTPERFORM and TP of RM5.10 based on an unchanged GGM- derived PBV of 1.54x (COE: 9.9%, TG: 4.0%, ROE: 13.0%) on a FY25F BVPS of RM3.14. We also applied a 5% premium to our TP based on our 4-star ESG rating, led by the stock’s strong green financing pipeline.

PBBANK is expected to continue commanding a leading GIL ratio amongst peers which could be attributable to its densely collateralised housing loan portfolio. While the stock may not have the highest dividend yield, the possibility for a more than biannual dividend payment could be of interest to certain investors. PBBANK is one of our 2QCY24 Top Picks.

Risks to our call include: (i) higher-than-expected margin squeeze, (ii) lower-than-expected loans growth, (iii) worse-than-expected deterioration in asset quality, (iv) further slowdown in capital market activities, (v) adverse currency fluctuations, and (vi) changes to OPR.

Source: Kenanga Research - 21 May 2024

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