This article first appeared in The Edge Financial Daily on July 9, 2019
Public Bank Bhd
(July 8, RM22.98)
Maintain buy with an unchanged fair value of RM25: We met Public Bank Bhd chief operating officer Chang Siew Yen recently for updates. We understand that in April, approvals for mortgage loans have improved slightly as the Home Ownership Campaigns’ rebates and incentives have stimulated some buying interest in residential properties.
Competition for small- and medium-sized enterprise (SME) loan remains intense. Even though other banks have been more aggressive on SME loans, the group does not intend to compete solely on pricing. It remains prudent, adopting a risk-based pricing approach on loans. We project the group to achieve a loan growth of 4.5% for the financial year ending Dec 31, 2019 (FY19) against its target of 5%.
On the recent overnight policy rate (OPR) cut of 25 basis points (bps) in May, this will impact its FY19 net interest margin (NIM) by 3bps to 4bps. The group is now guiding for 8bps to 9bps compression versus a mid-single digit contraction earlier on its NIM for FY19.
However, the impact of the OPR cut will be temporary, affecting its margins in the second quarter of FY19 (2QFY19) before gradually improving from 4QFY19 due to downward repricing of deposits. Most of the deposits are expected to be repriced after six months. Post-OPR cut in May, the group hinted that deposit competition has eased slightly. On the outlook of the OPR, management does not foresee another rate cut in the second half of 2019.
In terms of non-interest income, the fee and commission income from unit trust business is likely to be flat quarter-on-quarter in 2QFY19. Meanwhile, the decline in Malaysian Government Securities (MGS) yield is expected to provide benefits with opportunities of recognising mark-to-market and realised gains on its securities portfolio.
The group is keeping to its credit cost guidance to be less than 15bps for FY19. It is now targeting a credit cost of below 10bps for the year. For our FY19 estimate, we are now assuming a credit cost of 5bps (previously: 8bps) due to net write-back in provisions of RM3.2 million in 1QFY19.
With the ongoing challenges on revenue, negative JAW is still expected to persist in its upcoming 2QFY19 results with operating expenses outpacing total income growth. With that, the group cost-to-income ratio (CIR) for FY19 is expected to be slightly higher at 34% than FY18’s 33%.
The group will soon be launching a new mobile app with QR and face recognition capabilities as well as revamping its online banking. Over the next three years, the group has allocated a capital expenditure of RM600 million to enhance its IT hardware, software and knowledge of its employees. This includes RM180 million on fintech initiatives and projects. We believe that there is still room to improve its cost efficiency hence lowering its CIR after the completion of the investments going forward.
Recall that in FY18, dividend payout ratio was 47.9%. In FY19, a similar payout is expected for dividends. The group’s strength continues to lie in its robust asset quality with a strong credit culture. Meanwhile, its Common Equity Tier 1 ratio of 12.9% appears to be more conservative with significant provisions set aside resulting in a higher loan life coverage (including regulatory reserves) ratio of 244.1% as at end-March than its peers.
Our valuation is based on FY20 price-to-book value of 2.1 times supported by a return on equity of 13.2%. — AmInvestment Bank, July 8