Public Bank Bhd
(Oct 24, RM18.64)
Maintain “buy” with target price (TP) of RM22.60: Net interest margin (NIM) improved following the overnight policy rate hike in July. Non-interest income remained strong although assets under management dipped due to the overall weak capital market. Islamic banking income was flat.

Expenses remained under control and cost-to-income ratio reduced. Provisions remained low despite the anticipated slowdown in recoveries. This is testimony to Public Bank’s superior asset quality.

Retail loans remain the key growth driver. Year-on-year (y-o-y) loan growth stood at 10%, still above industry levels. Asset quality remained best in class with non-performing loan ratio stable at 0.65%. Deposits grew 9% y-o-y; growth was broad-based. Capital ratios were bolstered by its recent rights issue. No dividends were declared, as expected.

NIM improved in the quarter but this may not be sustainable as competitive pressure remains intense. Public Bank continues to focus on higher yielding segments such as small and medium enterprises, current account-savings account and retail deposits to manage NIM compression.

We believe Public Bank will continue to deliver sustainable earnings growth of 10% and 3% dividend yield.

However, we trimmed financial year 2014 to 2016 (FY14-FY16) earnings by 2% to 3% on account of slower growth in Islamic banking and a higher effective tax rate. Other financial metrics are unchanged.

Our TP is based on the Gordon Growth Model and assumes 8.4% cost of equity, 3% long-term growth and 18% return of equity. The TP implies 2.9 times of FY15 book value. The valuation premium is justified for a quality defensive bank. — AllianceDBS Research Sdn Bhd

This article first appeared in The Edge Financial Daily, on October 27, 2014.