Public Bank’s tepid results point to subdued growth

This article first appeared in The Edge Malaysia Weekly, on February 25, 2019 - March 03, 2019.
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PUBLIC Bank Bhd, considered one of the best-run local banks, turned in a resilient set of numbers in FY2018 but signs of a tougher operating environment were evident and have turned analysts more cautious about its prospects for the year.

The bank itself has cautious expectations, as evident in the subdued targets it has set for FY2019.

“The operating environment remains challenging for banks in general and Public Bank is not spared,” observes Maybank Investment Bank Research.

Some analysts say it points to a more subdued fourth-quarter reporting season for banks. Other big banks will be releasing their results this week.

Last year, Public Bank met all its key targets except for the loan growth target of 5%. Loans expanded by just 4.2% instead, both at the group level and within Malaysia, lower than the 4.6% growth recorded at home in the previous year.

“We think that this was due to slower growth in the market segments it is focusing on, that is, residential mortgages and SME loans,” says CGS-CIMB Research.

Its loan growth was also below the industry’s pace of 5.6%.

This year, Public Bank has set itself a modest loan growth target of 5%. Nevertheless, its management, during an analyst briefing last week, cautioned of downside risks, given the lacklustre property market and subdued commercial sector.

It also expects a drop in its net return on equity (ROE) this year to between 13% and 14%. Net ROE came in at 14.8% last year, within its targeted range of 14% to 15%.

The country’s third largest lender by assets saw net income grow just 0.9% last year to RM10.84 billion, affirming a widely held view that banks will find it increasingly tough to grow revenue amid slower loan growth, ongoing pressure on margins and volatile capital markets.

The weak growth in net income was mainly due to a six-basis-point contraction in net interest margin (NIM) and a 5% drop in non-interest income. Non-interest income fell mainly because of a 49.2% decline in investment income and a 28.8% drop in foreign exchange profit. Meanwhile, net interest income grew 2% to RM7.56 billion.

Despite a 16.7% drop in provisions, the weak expansion in the top line led to an unexciting net profit growth of 2.2% to RM5.59 billion. This was, nevertheless, broadly within analysts’ expectations.

In the fourth quarter, net profit fell 5.4% year on year to RM1.41 billion. NIM fell to 2.18% from 2.27% a year ago but was better than the 2.16% of the preceding quarter.

What was positive, however, is that Public Bank continued to display strength in asset quality and cost management.

Its gross impaired loan ratio stayed at 0.5%, by far better than the industry’s 1.45%. Its cost-to-income ratio of 33%, although slightly higher than the 31.9% in FY2017, also remains the best in the industry.

Additionally, shareholders had reason to cheer as the bank raised its dividend payout ratio to 48% in FY2018 from 43% the previous year, and dividend per share came in at a higher 69 sen compared with 61 sen.

“We have assumed a payout ratio of 50% going forward,” says Maybank Investment Bank Research.

At least four research houses — UOB Kay Hian Research, MIDF Research, Kenanga Research and AmInvestment Bank Research — cut their FY2019 earnings forecast for Public Bank after the results. Most, however, maintained their “hold” stance on the stock.

AmInvestment Bank Research lowered its call to “hold” from “buy” and cut its target price by 40 sen to RM25.60.

“We trim our earnings for FY2019/FY2020 by 0.4%/1.4% after imputing higher NIM compression and raising our cost-to-income ratio assumptions. This resulted in a lower projected FY2019 ROE of 13.5% (previously: 14.1%) leading to a price-to-book value (PBV) of 2.3 times. We expect mortgage loan growth to moderate in FY2019 as the property market is expected to remain soft. This, coupled with compression in NIM, is expected to result in a modest topline growth for FY2019,” the research house says in a Feb 21 report.

Bloomberg data shows a median target price of RM24.80 for the stock. The stock, which has gained 15.3% from a year ago, closed at RM24.98 last Friday.

“Despite the strong fundamentals, we still rate Public Bank a ‘hold’ in view of its rich valuations, one of the highest in the sector at  2020 price-to-earnings ratio of 15.2 times and 2019 PBV of 2.1 times,” says CGS-CIMB Research, also in a Feb 21 report.


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