Public Bank Bhd
(Feb 6, RM18.78)
Upgrade to buy from neutral with a higher target price (TP) of RM21. Public Bank Bhd’s net profit of RM1.25 billion for the fourth quarter of financial year 2014 ended December (4QFY14), up 22% year-on-year (y-o-y) or 5% quarter-on-quarter (q-o-q) was at the upper end of our and consensus estimates range, with 2014 net profit of RM4.52 billion, up 11% y-o-y, accounting for 103% of our and consensus net profit forecasts.

Key loan growth drivers were residential mortgages, up 12% y-o-y and lending to small and medium enterprises (SMEs), up 20% y-o-y. Total customer deposits rose 10% y-o-y or 3% q-o-q while current account and savings account (CASA) deposits grew 8% y-o-y or 3% q-o-q.

Hence, loan-to-deposit (LD) and  current account, savings account ratios were generally stable q-o-q at 88% and 25% respectively.

As expected, a second interim net dividend per share (DPS) of 31 sen was declared, bringing 2014 net DPS to 54 sen. The full-year dividend payout ratio was 46%.

We update our 2015 and 2016 earnings forecasts for the 2014 results and introduce our 2017 numbers. We lift our Gordon Growth Model (GGM)-derived TP to RM21 from RM20.60 following the updates.

We upgrade our recommendation on Public Bank to “buy” from “neutral”. The TP revision reflects the revision to our 2015 forecast, as well as an update in the 2014 (base) book value.

Amid an uncertain and volatile macro environment, we believe Public Bank offers investors a safe hideout. We like the group for its good earnings predictability (less reliant on market-related income and so on), sound asset quality and cost efficiency. Post last year’s rights issue, the group is now one of the better domestic capitalised banks. Finally, its book value has remained relatively resilient during times of adverse bond yield and foreign exchange movements, thus preserving its book value growth and the ability to continue creating shareholder value. — RHB Research, Feb 6

This article first appeared in The Edge Financial Daily, on February 9, 2015.