KUALA LUMPUR: Maybank Investment Bank Research sees Public Bank has one of the strongest fundamentals in Malaysia, but it sees little catalyst to rerate the stock.
It said on Wednesday Public Bank’s 1Q20 results showed weakness YoY as expected and it expects net interest margin (NIM) compression and higher credit costs to continue to weigh on earnings over the next few quarters.
“Hold maintained with a marginally higher TP of RM16.10 (+10sen) on rolling forward valuations to FY21, with an unchanged price-to-book value (PBV) target of 1.3 times (FY21E ROE: 11%). Prefer RHB Bank (BUY; TP: RM5.40) for exposure, ” it said.
Maybank Research said Public Bank’s 1Q20 net profit of RM1.33bil (-6% YoY, -6% QoQ) was within expectations at 26% of its full-year forecast.
“Positively, asset quality was stable while NOII growth provided support to earnings. On the flip side, loan growth slowed to just 2.9% on an annualised basis, NIM compressed 12bps QoQ, negative JAWS continued to be a drag on profitability while credit costs, though stable, were marginally higher QoQ, ” it said.
The JAWS ratio applies to how much a company generates over a fixed period compared with expenses. A higher ratio means higher profits and profitability growth rate.
It said Public Bank’s management expects FY20 loan growth to be in line with the industry’s 1%-2% (Maybank Research: +2.6% for Public Bank).
While the bank has guided for NIM compression of 15bps in FY20, the research house raised its assumption to 15bps from 11bps.
“Our forecasts assume a credit cost of 10bps in FY20 versus 5bps in FY19. Management guides for credit cost of less than 15bps.
“We trim FY20 earnings by a further 3% to factor in the higher NIM compression and expect FY20 net profit to contract by 11% before recovering 6% in FY21.
“We expect Public Bank’s ROE to come in at a lower 11.0% in FY20 versus 13.0% in FY19. Public Bank’s RM2bil worth of regulatory reserves would bolster the commercial bank’s (as opposed to the group’s) CET1 ratio to 12.8% from 11.9%.
“This, we think is comfortable, but unlikely to contribute to higher dividend payouts. We maintain a dividend payout ratio of 52% moving forward, ” the research house said.
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