Analysts red flag Public Bank’s higher interest expenses

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KUALA LUMPUR (Oct 23): Public Bank Bhd's latest set of financials have invited analysts' downgrades as they evaluated the impact of costlier funds on the group's profit.

CIMB Investment Bank Bhd and TA Securities Holdings Bhd said they had cut their profit forecast for Public Bank following the announcement of its third quarter financials.

Yesterday, Public Bank reported a 0.8% rise in third quarter net profit at RM1.2 billion from a year earlier on higher net interest besides fee and commission income. Foreign exchange gains also supported bottom line growth.

Public Bank said its RM1.2 billion net profit in the third quarter ended Sept 30, 2015 (3QFY15) compared to RM1.19 billion previously. For the nine-month period (9MFY15), net profit rose to RM3.57 billion from RM3.26 billion a year earlier while revenue was higher at RM14.25 billion versus RM12.33 billion.

9MFY15 interest expenses rose to RM5.89 billion from RM4.84 billion.

Today, CIMB Investment Bank analyst Winson Ng said Public Bank's 9MFY15 net profit accounted for 72% of CIMB Investment Bank's full-year forecast, hence, below CIMB Investment Bank's expectation.

Ng wrote in a note that Public Bank's 9MFY15 net profit, however, met consensus forecast at 75% of estimates.

"We raise our projected interest expense by about 2%, leading to c.2.5% drop in FY15–17 EPS (earnings per share). The net effect of the above and the EPS cut is an increase in our target price (TP) from RM17.00 to RM17.20," Ng said.

At 10.25am, Public Bank shares rose two sen or 0.1% to RM18.66 for a market capitalisation of RM72.03 billion. Ng said: "We still rate Public Bank as a 'reduce', given its rich valuations."

TA, which adjusted its Public Bank's TP to RM19.20, said it had cut its net profit forecast for Public Bank and downgraded the shares to "sell" from "hold".

In a note today, TA said the income forecast cut was in anticipation of Public Bank's higher cost of funds amid slower loan and deposit growth.

"As recoveries ease, we envisage another quarter of high impairment charge in 4Q," TA said.

(Note: The Edge Research's fundamental score reflects a company's profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations.)