Better-than-expected margins seen as potential catalyst for Public Bank

This article first appeared in The Edge Financial Daily, on September 19, 2019.
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Public Bank Bhd
(Sept 18, RM20.16)
Maintain hold with a lower target price (TP) of RM21.15:
Public Bank Bhd continues to lead in cost efficiency and asset quality, which have also translated into low net credit costs.

Given its highly efficient cost structure, the potential for further optimisation and tighter management in periods of revenue stress is also more limited. As such, any major improvement to the group’s earnings profile and return on equity (ROE) would hinge on improvement to its top line.

With that said, we think the outlook for the group is challenging as thinner margins and slowing loan growth will weigh on net interest income.

We also believe the group’s non-interest income may not be able to mitigate this past the immediate term due to volatile markets affecting its unit trust income and a comparatively smaller investment book.

Consequently, we have trimmed our financial year ending Dec 31, 2020 (FY20) to FY21 earnings by 1% to 2%. Our estimates do not impute a rate cut in FY20.

Our earnings forecast is below consensus’, mainly from lower net interest income assumptions.

Potential catalysts are better-than-expected margins and stronger growth in Public Bank’s non-interest income would help drive earnings and ROE, which would drive valuations higher.

We lowered our TP after imputing a lower earnings forecast and ROE assumption, from 13% to 12.5%, as well as a higher cost of equity assumption of 9% from 8.5%, after updating our assumption on the stock’s beta.

The group’s valuation tends to ebb and flow with its ROE trajectory. We think it is fair at this level considering its moderating ROE.

A key derating factor for the group would be the failure to show earnings growth and maintain its asset-quality track record. Significant foreign outflows are also a dampener for stock price considering the group’s high foreign shareholding. — AllianceDBS Research, Sept 18