Public Bank Bhd
(Oct 26, RM24.62)
Downgrade to hold with a lower target price of RM23.50: Public Bank Bhd’s net profit of RM4.18 billion for its first nine months of financial year 2018 (9MFY18) was broadly within our and consensus estimates. Though net profit for the third quarter ended Sept 30, 2018 (3QFY18) saw a marginal decline both quarter-on-quarter (q-o-q) and year-on-year (y-o-y), there were no major surprises apart from seeing a further eight basis-point (bps) q-o-q contraction in net interest margin (NIM) to 2.16%. The 9MFY18 pre-provision operating profit y-o-y growth was lacklustre due to flat non-interest income for 9MFY18 and marginal increase in overheads. The bottom-line growth continued to be aided by lower provisions, given the sound asset quality with the gross impaired loans (GIL) ratio sustaining at 0.5% as at September 2018. Given a weaker NIM outlook and slower loan growth, we are revising down our earnings for 2018 to 2020 by 3.2% to 6.4%. We downgrade Public Bank to “hold” from “buy”, with a lower 12-month TP of RM23.50 from RM26.30.
Though Public Bank reported a decent 9MFY18 net profit, its 3QFY18 net profit was down 1.5% y-o-y and 0.9% q-o-q. Overall, the results were broadly within our and consensus estimates. Public Bank’s 9MFY18 net income grew by a marginal 2.2% y-o-y as a result of flat non-interest income y-o-y while fund-based income grew by a modest 2.8% y-o-y arising from a 3bps NIM compression y-o-y for 9MFY18 against 2.27% in the previous year’s corresponding quarter.
3QFY18 NIM continued to decline, down 8bps q-o-q to 2.16% due to funding cost pressure. Operationally, loans and deposits grew by 4.4% y-o-y and 3.8% y-o-y, below industry growth in Malaysia. 9MFY18 cost-to-income ratio (CIR) was sustained at 33% while asset quality remained sound with the GIL ratio at 0.5%.
As we revised our NIM assumptions from 2.3% and 2.33% for 2018 to 2020 to about 2.18% and 2.2%, and lowered our loan growth assumptions from 5% per annum to 4.5% per annum for the same period, it resulted in downward revisions of 3.2%, 6.3% and 6.4% for earnings in 2018, 2019 and 2020.
For 2018 to 2020, we expect fund-based income growth of 3% to 3.5% y-o-y, CIR of 32% to 33% and net credit cost of 8bps. Downside risks include further NIM compression due to more competitive rates while stronger loan growth poses an upside risk. — Affin Hwang Capital Research, Oct 26