Public Bank Bhd
(April 21, RM19.68)
Maintain buy with an unchanged target price (TP) of RM21.80: Public Bank’s first quarter of financial year ending Dec 31, 2015 (1QFY15) net profit of RM1.1 billion, up 15% year-on-year (y-o-y), outperformed our expectation.

Lower impaired loan allowances, which decreased 10.7% y-o-y and is sharply below our forecast, is equivalent to an annualised credit charge of 12 basis points (bps) [versus 15bps in 1QFY14], bolstering Public Bank’s 1QFY15 pre-provision operating profit, which, came in line with our 2015 forecast.

Vis-à-vis street estimates, Public Bank’s 1QFY15 results were relatively within expectations. No dividends were proposed.

There are no other surprises in 1QFY15 — operationally, Public Bank bucked the moderating industry trends with a return on equity (ROE) of 17.1% versus industry ROE of 13% to14%, cost-to-income ratio of 30%, compared with its peers which is around 48% to 49%, and an annualised loan growth of 13.1%, higher than the industry’s 7.8%.

The 1QFY15 earnings were lifted by fund-based income (up 9.4% y-o-y); non-interest income (up 15.7% y-o-y); and a decline in allowances by 10.7% y-o-y. Net interest margin, however, continued to decline, down 13bps y-o-y to 2.15% from 2.28%.

Asset quality remains intact, with a gross impaired loan ratio of 0.56%, a rising loan loss cover to 128.1% (from 122.4% in December 2014).

Meanwhile, capital ratios remained stable: Common Equity Tier 1 at 10.5%, Tier-1 at 11.7% and total capital ratio at 15.2%.

Amid a more cautious economic outlook, we still favour Public Bank, as it remains defensive in nature owing to its sound asset quality, established retail-banking franchise and a well-capitalised balance sheet, which are its key competitive edges vis-à-vis other peers.

We maintain our “buy” rating, with a TP unchanged based on a 2.59 times price-to-book value on 2016 estimate ROE of 15%. — Affin Hwang Capital, April 21

This article first appeared in The Edge Financial Daily, on April 22, 2015.