This article first appeared in The Edge Financial Daily on May 4, 2018

Public Bank Bhd
(May 3, RM23.94)
Maintain hold with a higher target price (TP) of RM23.30: At 23% of our full-year forecast, Public Bank Bhd’s first quarter of financial year 2018 (1QFY18) net profit was below our expectations. This was because we have been overly optimistic in our projection of total income growth. However, Public Bank’s 1QFY18 net profit was in line with market expectations at 24% of Bloomberg consensus estimate. As per norm, no dividend was declared for 1QFY18. 1QFY18 net profit rose by 12.6% year-on-year (y-o-y) as revenue growth of 6.6% y-o-y outpaced the 1.4% y-o-y increase in overheads.

Loan growth eased marginally from 3.6% y-o-y at end-December 2017 to 3.4% y-o-y at end-March 2018, below the industry’s rate of 4.4% y-o-y and the slowest since 1999. The drags were the contraction of 2.4% y-o-y in auto loans and 4.2% y-o-y in working capital loans at end-March 2018. The key support for loan growth was the 8.9% y-o-y expansion in residential mortgages at end-March 2018, on par with the industry’s pace.

On a positive note, Public Bank’s net interest margin expanded by two basis points (bps) y-o-y and 6bps quarter-on-quarter to 2.33% in 1QFY18. We believe this mainly reflected the positive impact from the rate hike in January 2018.

Contrary to our expectation of a marginal decline, Public Bank’s common equity Tier-1 (CET1) capital ratio rose by 20bps, which is positive for Public Bank, upon the adoption of Malaysian Financial Reporting Standard (MFRS) 9. This was mainly due to its high regulatory reserve of RM2.4 billion, which was more than enough to cushion the RM451 million increase in provision, and a surprise gain from the revaluation of equity investment.

We cut FY18 forecast (FY18F) to FY20F earnings per share (EPS) forecasts by 3.3% as we lower our net interest income projections by 3.1%. We think the margin expansion trend could benefit Public Bank’s long-term EPS growth. Hence, we raise our assumed EPS growth rate for the interim growth phase of our dividend discount model (DDM) from 5% to 6%, leading to an increase in our DDM-based target price from RM21.30 to RM23.30.

Despite its strong fundamentals, we still rate Public Bank a “hold” in view of its rich valuations — the highest in the sector for its calendar year 2019 forecast (CY19F) price-earnings (PE) of 14.5 times and CY19F price-to-book value of 1.8 times. A potential upside risk to our call is a strong pickup in loan growth, while a key downside risk is a drastic deterioration in asset quality. We prefer RHB Bank for exposure to Malaysian banks. We see RM21.60 as a viable entry level for Public Bank as the implied CY19F PE for this is close to the five-year average of 13.2 times. — CGSCIMB Research, May 2