Public Bank - Better gauge of true value under fair value accounting BUY

- We are maintaining our BUY rating on Public Bank Bhd (PBB), with a higher fair value of RM16.70/share (vs. RM15.50/share previously). This is based on an ROE  of 23.3% FY12 (previously 22.7.0%) and a higher book value of RM4.94/share (previously RM4.72/share) FY12F. This leads to a fair P/BV of 3.4x (3.3x previously).                              

- Our latest company visits confirms that PBB should  be on track to full adoption of FRS139. This is positive on two fronts. Firstly, in terms of balance sheet, we  foresee that PBB should be able to write back at least RM700mil to its shareholders funds, from previously accumulated historical collective assessment (similar to general provisions) which is essentially not required in the case of PBB. This is expected to boost book value by 4.7%, to RM4.94/share (from RM4.72/share) FY12F. 

- Secondly, we also expect credit costs to be much lower ahead. This is because under full adoption of FRS139, collective assessment rate (as a percentage of gross loans less individual assessment) should be at the most 1%, vs. the current 1.5% being adopted under the transitional provision of FRS139 by PBB. 

- This means that the collective assessment charge on every new incremental new loan should also be lowered to 1%, from the current 1.5%, which would lead to lower collective assessment expense in the P&L. Overall,  we foresee credit costs lowered to 23bps FY12F (from 36bps previously). 

- Our earnings have been upgraded by 5.5% for FY12F. With this, we have also lifted our dividend forecasts accordingly, to RM0.53/share (from RM0.503/share) FY12F. Dividend payout ratio is still at 49.8%, in line with the company’s guidance of 50%. With the latest upgrade, we now foresee dividend rising by 10% (previously 5%) YoY in FY12F. 

- We expect the greenlight to be given for PBB’s full adoption of FRS139 by its 1QFY12, which is likely to be released in the next couple of weeks. In terms of P/BV, this has immediate positive impact as it should lower P/BV to 2.8x, which is the trough levels hit by PBB during the 2008 crisis. 

- We foresee rerating catalysts from:- (a) steady rise in absolute NDPS; (b) confirmation of benign impaired loans and credit costs; and (c) possible lift to book value with full adoption of FRS139.

Source: AmeSecurities