This article first appeared in The Edge Financial Daily on July 27, 2017

Public Bank Bhd
(July 26, RM20.50)
Maintain hold with a target price (TP) of RM19.50: Although Public Bank Bhd’s first half ended June 30, 2017 (1HFY17) net profit accounted for only 45.7% of our full-year forecast (and 48.9% of Bloomberg consensus estimates), we regard the results as in line as 2HFY17 is traditionally stronger than 1H. We also see the interim net dividend per share of 27 sen as largely in line with our expectations. We retain our FY17 forecast (FY17F) to FY19F earnings per share forecasts and dividend discount model-based TP of RM19.50.

Public Bank’s net profit only advanced by 3.8% year-on-year (y-o-y) in 1HFY17, mainly dragged down by the 0.7% y-o-y drop in non-interest income. The 1HFY17 non-interest income was mainly dragged down by weaker investment income and foreign exchange gains. On a positive note, net interest income rose by a strong 8.3% y-o-y in 1HFY17, thanks to margin expansion. Also, 1HFY17 loan loss provisioning plunged by 31.9% y-o-y.

Loan growth eased from 7% y-o-y in March to 5.3% y-o-y in June, the weakest since we first compiled the quarterly loan growth in 2003. This was dragged down by: i) the slowdown in property loan expansion — from 10.3% y-o-y in March to 9.1% y-o-y in June for residential mortgages and from 6.8% y-o-y to 4.3% y-o-y for non-residential mortgages; and ii) the widening of the contraction in auto loans from 1% y-o-y in March to 2% y-o-y in June. But the growth in working capital loans was sustained at 8.3% y-o-y in March to June.

Public Bank’s gross impaired loan ratio was stable at 0.5% as at end-March and end-June. Although loan loss coverage fell from 104% as at end-March, it remained comfortable at 98.1% as at end-June.

In spite of its strong fundamentals, we rate Public Bank as a “hold” in view of its rich valuations. Its FY18F price-earnings ratio (PER) of 12.7 times and price-to-book value (PBV) of 1.9 times are among the highest in the sector, while its FY17F dividend yield of 3.5% is below the sector’s average of about 4%. 

An upside risk to our call is a strong pickup in loan growth, while a key downside risk is a drastic deterioration in asset quality. — CIMB Research, July 25