Inter-Pacific downgrades PUBLIC Bank

Public Bank Bhd
(July 21, RM12.14)
Downgrade to neutral at RM12.20, target price cut to RM12.70 (from RM13.34): We have slashed our target price to RM12.70 based on the Gordon Growth Model with weighted average cost of capital of 7.46%, return on equity (ROE) of 26% FY2010 and P/BV of 3.4 times. Our recommendation is lowered to neutral from outperform in view of the underlying concern over the risk of potentially onerous regulatory core equity capital requirements. Our previous target price was RM13.34. Nonetheless, PBB is on track to deliver the 15% loans growth target in FY2010, driven by its strategic organic focus on retail business reflected by strong consumer spending and business activities. Further lending support is PBB’s superior asset quality.

Net profit in 2QFY10 rose 20.2% year-on-year (y-o-y) or 7.1% q-o-q to RM734.1 million, bringing 1HFY10 net profit to RM1.42 billion or +18.3% y-o-y. Healthy 1HFY10 performance was due to higher net interest and financing income (+15.6% y-o-y to RM2.6 billion); higher non-interest income (+19% y-o-y to RM787.1 million) driven by the increase in unit trust management fees as well as higher forex income and brokerage and commission; and lower loan impairment allowance (-6.6% y-o-y to RM314.5 million). These were partially offset by higher other operating expenses (+15.8% y-o-y to RM1.2 billion) following higher personnel costs due to the expansion of the marketing sales force and higher business volume.

Net interest margin (NIM) in 2QFY10 benefitted from the two rate hikew in March and May totalling 50 basis points. It resulted in a direct improvement in NIM, raising it to 2.7% in 2QFY10 from 2.5% in 1QFY10 from a low of 2.4% in 1Q 09. We expect NIM in the subsequent quarters to continue enjoying a positive impact from the OPR. But rates of medium- to long-term deposits will eventually reset and revert NIM expansion to the 2.4% level.

Higher q-o-q 2QFY10 loan impairment allowances rose 25% to RM174.7 million due to (i) higher collective assessment allowance in 2Q2010 attributed to stronger loan growth; (ii) absence of certain one-off recovery in 1Q2010; and (iii) higher credit charges incurred in the Cambodia operations. But it fell by 6.6% y-o-y to RM314.5 million in 1HFY10 due to lower loan impairment allowance for overseas operations of 28%. For the domestic operations, loan impairment allowance rose by 7.6% following higher loan growth of 7.3% or 14.6% annualised achieved in 1HFY10.

Underpinned by improving economic conditions, loans grew by 7.3% y-o-y in 1HFY10 or 14.6% annualised growth to reach RM147.6 billion. Domestic loans rose by 8.4% (annualised 16.7%) in 1HFY10, while overseas loan growth fell 3.2% y-o-y from the impact of the exchange rate, that is the strengthening of the ringgit against the US dollar. Deposits grew 2.2% supported by the stronger domestic core customer deposit growth of 7.6% (annualised 15.2%). Hence, asset expansion was driven by strong loans and deposit growth, up 0.9% y-o-y to RM219 million.

The loan approval rate for vehicle financing and housing in 1HFY10 surged by 22.5% y-o-y and 12.8% y-o-y respectively. SME lending, accounts for 20.4% of the total loans approved in 1HFY10, rose by 8.7% y-o-y. Underpinned by the strong loan approvals in 1HFY10, we expect it will continue to support loan growth momentum in the coming quarters.

Despite more stringent criteria on classification of impaired loans due to the adoption of FRS 139 from 2010, impaired loans ratio remained low at 1.2% with high loan loss reserve of 133.9%. Based on old GP3 classification of three months non-performing loans, NPL ratio improved to 0.9% from 1% at end-December 2009.

Loan loss coverage ratio at 133.9% is still one of the highest and most prudent in the banking industry. RWCR and CCR are at 13.9% and 10% respectively as at end-June 2010. Cost-to-income ratio remains efficient at 34.6% agaisnt 48% for the industry. — Inter-Pacific Research, July 21


This article appeared in The Edge Financial Daily, July 22, 2010.