This article first appeared in The Edge Financial Daily on August 16, 2019

Public Bank Bhd
(Aug 15, RM20.80)
Maintain buy with a lower fair value (FV) of RM23.60: We are maintaining our “buy” call on Public Bank Bhd with a lower FV of RM23.60 per share from RM25 per share. Our valuation is based on a financial year ending 2020 price-to book value (FY20 P/BV) of two times supported by a return on equity (ROE) of 13%. Our forward price-to-book (PB) is lower than the historical mean of 2.3 times (five-year average). We trim our FY19/20/21 earnings by 0.6%/0.9%/0.4% to RM5.53 billion/RM5.79 billion/RM6.13 billion respectively after factoring in another overnight policy rate (OPR) cut of 25 basis point (bps) in the second half of 2019 (2H19). We continue to see value emerging after the recent steep selldown on the stock and believe that concerns over the group’s Hong Kong operations due to protests as well as on its asset quality are unwarranted.

The group recorded a net profit of RM1.3 billion in the second quarter of FY19 (2QFY19) which was lower by 5.5%  quarter-on-quarter (q-o-q) largely due to higher operating expenses and provisions for loan losses compared to a net write-back of allowances for impairments in 1QFY19.

Core earnings for the first six months of FY19 (6M19) came in at RM2.74 billion, a modest decline of 2.1% year-on-year (y-o-y) underpinned by higher overhead expenses and lower net interest income due to the OPR cut of 25bps in May 2019. Cumulative earnings were within expectations, making up 49.3% of our and 48.2% of consensus estimates. The group delivered an ROE of 13.2% for 6M19, in line with our estimate.

Year to date (YTD), the group’s loan (domestic and overseas) grew at an annualised rate of 4% or 4.2% y-o-y. Domestic loans grew by an annualised rate of 4.3%, outpacing the industry’s 2.7% annualised growth.

The group’s deposits accelerated to 5.9% annualised or 5.8% y-o-y resulting in a lower net loan-to-deposit ratio of 92.2%. Current account and savings account ratio remained stable at 25.3%.

YTD, the group’s net interest margin fell 6bps to 2.16% due to the recent OPR cut and was in line with the management’s guidance of up to high-single-digit compression for FY19.

The group declared a first interim dividend of 33 sen per share (payout: 46.7%) for 6M19 which was slightly higher than the 32 sen per share (payout: 44.3%) in 6M18. — AmInvestment Bank, Aug 15