PBBANK (FV RM14.40- NEUTRAL) 1QFY12 Results Review: Going at a Slower Pace

The group reported 1QFY12 results that were largely in line with consensus and our full-year estimates. The maiden adoption of MFRS139 resulted in a write back of excess collective assessment allowance, which  amounts to RM859m. Despite the write back which will have the effect of raising its core equity capital ratios by 0.5%, dividend payout is unlikely to rise materially given the need to conserve additional capital for Basel 3’s counter cyclical buffers of up to 2.5%.  We maintain our NEUTRAL call but with a higher FV of RM14.40 after incorporating the higher book values from the write back but partially offset by lower ROEs (ROE of 21.9% and implied FY12 P/BV of 2.84x).

Within estimates. Public Bank’s 1QFY12 annualized earnings was in line with both consensus and our full-year estimates with 1Q numbers representing 24.8% of our fullyear earnings. The 1QFY12 earnings, which reflected the maiden adoption of MFRS139, grew 6.4% y-o-y largely due to lower provisions from loan recoveries and lower collective assessment provisions following the slower loans growth. The 6.4% earnings growth already incorporates a comparable restatement of 1QFY11’s provisions on full MFRS139 adoption that resulted in lower collective assessment from 1.5% to 0.8%. Preoperating provision profit was up a subdued 3.3% y-o-y and contracted 3.4% q-o-q on the back of: (i) further pressure on NIMs  – which declined 10bps to 2.5%, (ii) higher overhead expenses (+10.2% y-o-y and +5.7% q-o-q), and (iii) slower 2.3% sequential loans growth vs last corresponding 1Q11’s sequential growth of 3.3%.

Impact of MFRS139 – will not give rise to higher dividends.  The adoption of MFRS139 will have the effect of releasing RM859m in excess collective assessment into retained earnings which will, in turn, boost the group’s core equity capital ratio by 0.5% to 8.1% by end-2012. Although the entire write back amount of RM859m is distributable as dividends, contrary to earlier concerns that  Bank Negara Malaysia may insist on a write back to non-distributable regulatory reserve, we believe that this one-off write back is still unlikely to prompt an upward re-rating in recurring dividend payouts as the group still needs to conserve capital for: (i) Basel 3 countercyclical buffers of up to 2.5%, raising the total core equity capital requirement to 9.5% by 2015, and (ii) the group’s intention to maintain its current low-teens growth rates. As such, the write back of its excess collective allowance into core equity tier 1 capital is certainly positive in removing some initial overhang of a potential equity capital raising exercise. However, because the one-off boost of only 0.5ppts is not sufficient to raise the group’s  core equity capital ratios comfortably above the 9% level to meet Basel 3’s additional counter cyclical buffer requirement of up to 2.5%, we believe that the group is likely to retain its existing 50% dividend payout ratio with minimal upside expected.

Source: OSK188