Public Bank - Expect upward trend in dividend BUY

- We are maintaining our BUY rating on Public Bank Bhd (PBB), with an unchanged fair value of RM16.70/share. This is based on an unchanged ROE of 22.9% FY12F and fair P/BV of 3.3x.   

                            

- PBB’s 2QFY12 net earnings are in line. However, the company declared a flat interim single-tier tax dividend of RM0.20/share for 1HFY12, unchanged vs. 1HFY11. But, the company maintained its target of an increase in absolute quantum of dividend for FY12F, which is now expected to be met in the final DPS to be announced in February 2013. Further, it is likely to maintain a dividend payout ratio at close to the 48% achieved in FY11. We are maintaining our forecast of an overall increase of 10.4% YoY in net dividend to RM0.53/share for FY12F, from RM0.48/share in FY11. 

- Loans growth was stronger at an annualised rate of 10.8% in 2QFY12 compared with 9.5% in 1QFY12, in line with the company’s targeted group loans growth of 10% to 11% for FY12F. Net interest margin (NIM) was unchanged at 2.5% on QoQ basis. 

- The absolute level of its gross impaired loans continued to be driven lower, with a fall in the total balance by 3.3% QoQ. Gross impaired loans ratio for the group was sustained at 0.8% in 2QFY12, the same as in 1QFY12. Loan loss cover was raised to 122.9% in 2QFY12 from 117.1% in 1QFY12. Credit costs remained low at only 18bps in 2QFY12, which is lower than the earlier guidance of a low 20s for FY12F. 

- Bank Negara has published a consultative paper addressing capital requirements, including possible counter-cyclical buffer ratio which is expected to be determined only in 2014 after the consultative process. However, what is positive and new from the consultative paper is a proposal that the counter-cyclical buffer, if any, will be implemented on a gradual basis in accordance with a scaling factor from 2015 to 2018. If this is the case, this implies there is less of a possibility of PBB undertaking a rights issue in 2015. At any rate, with the flat dividend, common equity ratio had been increased substantially to 8.2% in 2QFY12 from 7.8% in 1QFY12.

- 2QFY12 results were positive as it indicated a stable NIM, much better-than-expected asset quality as well as credit costs trend and strong increase in common equity ratio. In addition, given the latest consultative paper, we believe there is now less of a likelihood of PBB considering a rights issue in 2015. We foresee new rerating catalysts from:- (a) steady rise in absolute DPS; (b) confirmation of benign impaired loans and credit costs; and (c) gradual increase in common equity ratio, implying less of a possibility for a rights issue by 2015.   

Source: AmeSecurities