This article first appeared in The Edge Financial Daily on March 31, 2020

Public Bank Bhd
(March 30, RM15.82)
Upgrade to buy with a lower target price (TP) of RM17.90: Given economic uncertainties globally due to Covid-19, Public Bank Bhd fits our preference for banks with a strong asset quality and robust capital strength to withstand downside risks from a potential spike in loan provisions. Over the past 10 years, the bank’s credit cost has been consistently below the sector’s average.

RHB economists have forecast the country’s gross domestic product (GDP) growth slowing to 0% in 2020 versus 2019’s +4.3%, and a sharp rebound by 5.7% in 2021 aided by the government’s RM250 billion economic stimulus package. We expect Bank Negara Malaysia (BNM) to cut the overnight policy rate (OPR) by another 50 basis points (bps) to 2% in the first half of 2020 (1H20), before raising it back to 2.5% in 1H21 as the economy recovers from the fourth quarter of 2020 (4Q20).

Just like peers, Public Bank supports BNM’s call for financial institutions to extend an automatic moratorium on loan repayments to individuals and small and medium enterprises (SMEs) for six months from April 1. This will give affected borrowers an immediate reprieve and a much needed breathing space to reassess their financial positions.

The management shared that after the February 2020 announcement, Public Bank received moratorium applications amounting to less than 1% of total loans. Most of them were from SMEs and some corporates, and less than 30% from individuals. SMEs and individuals account for about 76% of Public Bank’s domestic loans of RM307.2 billion.

The management believes the current financial dislocation is temporary, which coupled with the bank’s commitment to resume repayments after the moratorium should help preserve its asset quality. The suspension in ageing of loan accounts during the six-month period would likely keep Public Bank’s impairment charges benign in the forecast financial year ending Dec 31, 2020 (FY20F).

At end-2019, Public Bank’s gross impaired loan ratio was a low 0.49%, while the loan life coverage ratio including regulatory reserves was a high 249.8%. Its credit cost was a low 5bps, versus the sector’s average of 30bps, in FY19.

As interest on loans is accrued over the moratorium period, banks’ interest income will be unaffected. Therefore, we expect Public Bank’s net interest income to dip 1% for FY20 mainly on a net interest margin (NIM) compression from the cumulative four rate cuts this year. However, its NIM should recover in FY21 based on our expectations that the OPR will rise 50bps in 1H21.

With our projected earnings trimmed 1% to 4% for FY20 and FY21, we now expect Public Bank’s net profit to decline 3% for FY20 but recover 7.5% for FY21. Our Gordon growth model-based TP is lowered to RM17.90 after factoring in a higher cost of equity and deriving it from a price-to-book value of 1.5 times. — RHB Research Institute, March 30