This article first appeared in The Edge Financial Daily on February 21, 2020

Public Bank Bhd
(Feb 20, RM18.12)
Maintain add with a lower target price (TP) of RM22.60: Following Bank Negara Malaysia’s move to cut overnight policy rate (OPR) by 25 basis points (bps) to 2.75% on Jan 22, Public Bank Bhd reduced its base rate by 25bps to 3.27% effective Jan 28. On the same day, it also cut its fixed deposit (FD) rates by 25bps for all tenors.

Public Bank’s 25bps cuts in base rate and FD rates were in line with our expectations. As such, we stick to our view that the OPR cut on Jan 20 will lower its financial year ending Dec 31, 2020 forecast (FY20F) net profit by 1.1% (on a full-year basis), as highlighted in our banking report dated Jan 22. We expect the bank to take similar action at the next OPR cut in the first half of 2020, which is anticipated by our economist. Based on this, the negative impact from two OPR cuts on Public Bank’s FY20F net profit will be manageable at only about 2%.

Based on our analysis, the negative impact of every 25bps OPR cut on Public Bank’s net profit (of 1.1%) is the lowest among local banks. This is because: i) its floating rate loan ratio of 77% projected for FY20F is the third lowest in the sector; ii) it has a relatively lower ratio of 26.1% for low-cost deposits (which means that it has a higher proportion of FDs which are fully repriced) versus the sector’s average of 28.9%; and iii) about 7% of its loans are from its overseas operations and, hence, will not be affected by the OPR cuts. The bank has banking operations in Hong Kong, Vietnam and Cambodia.

We trim our FY20-21F earnings per share forecasts for Public Bank by about 1.9% to factor in two OPR cuts, including the one on Jan 22. These are based on the assumptions that the lending and FD rates will be reduced by 25bps each following both OPR cuts. Consequently, our dividend discount model-based TP is reduced from RM23.10 to RM22.60.

We retain our “add” call on Public Bank as we believe it is the most defensive among its peers against the expected rise in the industry’s gross impaired loans ratio and credit costs. Furthermore, based our assessment, the OPR cuts will have the smallest impact on Public Bank among local banks. A rerating catalyst is superior financial performance (relative to other banks) amid the current uncertain operating environment. — CGS-CIMB Research, Feb 19