This article first appeared in The Edge Financial Daily on April 25, 2017
Public Bank Bhd (PBB)
(April 21, RM19.96)
Maintain hold with an unchanged target price of RM19.50: Although Public Bank Bhd’s first quarter of financial year 2017 (1QFY17) net profit accounted for only 22.1% of our full-year forecast (and 23.9% of Bloomberg consensus estimates), we regard the results as in line as 1Q is traditionally the weakest quarter. We expect quarter-on-quarter earnings improvements in the coming quarters, arising from healthy loan growth and sustained margins. As a norm, no dividend was declared in 1QFY17.
The positive takeaway from the 1QFY17 results is the 11 basis points year-on-year (y-o-y) expansion in net interest margin, despite the negative impact of the rate cut in July 2017. This pushed up net interest income growth to 8.3% y-o-y in 1QFY17, possibly one of the strongest in 1QFY17 among the local banks. Nonetheless, non-interest income slid 13.1% y-o-y in 1QFY17, impacted by the 90.2% y-o-y plunge in investment income and 46% y-o-y fall in foreign exchange income. This was a major reason for the weak net profit growth of 1.5% y-o-y in 1QFY17.
Loan growth eased from 7.5% y-o-y at end-December 2016 to 7% y-o-y at end-March 2017, but this would still be above the industry’s pace of 5% to 6%. Growth was dragged down by the slowdown in the expansion of non-residential mortgages from 8.6% y-o-y at end-December 2016 to 6.8% y-o-y at end-March 2017 and the wider contraction of 1% y-o-y for auto loans. However, growth in working capital loans improved, while the momentum for residential mortgages was sustained at 10.3% at end-March 2017, similar to that as at end-December 2016.
Despite having the best asset quality in the sector, Public Bank still saw an improvement in its gross impaired loans ratio from 0.51% at end-December 2016 to 0.49% at end-March 2017. Loan loss coverage was at a comfortable level, rising from 102.7% at end-December 2016 to 104% at end-March 2017. — CIMB Research, April 20