Public Bank seen as superior


By P.W. THONG

Public Bank Bhd is generally and strongly viewed as one of the safest stocks around for investors, considering the uncertainty of an impending war on Iraq and its implications on the world economy and Malaysia. 

According to analysts who track the country’s fourth largest lender, Public Bank offers not only superior and consistent dividend payouts, but also solid earnings growth with good management track records. 

Public Bank only recently announced that its pre-tax earnings rose 2.4 per cent in 2002 on higher lending activities coupled with increased income from non-interest assets such as Islamic banking activities.  

The sterling results was however, partially offset by lower earnings and higher provisions in its Hong Kong 55.4 per cent-owned finance company JCG Holdings Ltd.  

For the year ended Dec 31 2002, Public Bank posted a pre-tax profit of RM1.28 billion compared to RM1.25 billion the previous year. Net interest income for the year also rose by 4 per cent, at RM1.97 billion in 2002 compared with RM1.89 billion in 2001. Non-interest bearing activities such as Islamic lending rose by a strong 60.5 per cent to RM169.6 million, while non-interest income gained 0.9 per cent. 

On a quarterly basis, group pre-tax profit rose marginally by 0.5 per cent to RM335.9 million in the fourth quarter from fourth quarter of 2001 while gross loans grew by an encouraging rate of 5 per cent, far higher than the industry average of 1 per cent.  

Affin-UOB says the final results were within expectations, although the earnings were 3 per cent off its forecast and 5 per cent below consensus estimates. The research house says Public Bank is one of the few banking groups that enjoy healthy operating profits owing to its superior loan growth.  

It also notes that Public Bank’s gross non-performing loan (NPL) ratio declined further to 4.3 per cent as at end-December 2002 from 5.7 per cent in June 2002. It is no surprise then that Affin-UOB has a “buy” call on the stock. 

“Public Bank remains one of the best managed banks where NPLs are concerned. By comparison, the industry's NPL ratio presently stands at about 12 per cent,’’ it adds. 

Affin-UOB expects Public Bank to post a strong operational growth of about 13 per cent in the current year, as interest income from the strong loans growth in 2002 starts to filter through to this year's earnings.  

Public Bank has also just received the nod from the Securities Commission to privatise its 65.76 per cent owned Public Finance Bhd. Under the deal announced late last year, Public Bank will issue three Public Bank shares for every Public Finance share held by minority shareholders.  

In addition, Public Finance will issue a gross 138.9 per cent special dividend, or net dividend of RM1 to its shareholders. After the privatisation exercise is completed, Public Bank will make a 1-for-4 bonus issue exercise. 

OSK Research says the whole exercise is value enhancing for Public Bank, as the bank will not only reap the benefits of cost rationalisation, but its earnings per share (EPS) could also improve by between 4 per cent and 5 per cent in the current financial year ending Dec 31, 2003. 

At those EPS levels, Public Bank is trading at an undemanding price to earnings (PE) ratio of 11.2 times, compared with its five year historical average of 17 times. In addition, Public Bank’s price to book ratio of 1.7 times is deemed attractive considering its high return on equity of 13 per cent. 

“We maintain our buy recommendation (on Public Bank) with a target price of RM3.40 based on its five year historical PE ratio of 17 times,’’ says analyst Karin Phua of OSK. 

Jupiter Securities also points out that although taking Public Finance private will result in a further 8.8 per cent enlargement to Public Bank’s paid-up capital, it will be offset by the 12.2 per cent enhancement to earnings via a reduction in minority interests in group earnings. 

JP Morgan institutional equities vice-president and banking analyst Tan Pye Sen says Public Bank has been a star performer in the Malaysian portfolio over the past year, outperforming the KLCI by 28 per cent during that period.  

However, going forward, JP Morgan expects Public Bank’s share price to trade largely in line with the overall market for the rest of 2003. The foreign house has assigned a neutral rating on Public Bank. 

Jupiter Securities concludes that any investment consideration on Public Bank must take into account the increasingly attractive dividend yield rather than the capital gains it could offer. 

“The net dividend yield of 2.84 per cent when combined with a potential capital appreciation of just 14 per cent on the stock price would tilt our recommendation in favour of a buy,’’ it adds. 

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