Public Bank - Taking Smaller Steps

The group’s 1HFY12 results were largely in line with consensus and our full-year estimates. Although the group is a solid investment during times of uncertainty given its superior asset quality, a dampened growth outlook and margin compression are the key challenges for 2012, with a dividend upside surprise unlikely to materialize in the immediate to medium term. Given the limited dividend payout upside, slowing consumer lending growth as well as NIMs pressure, we are maintaining our NEUTRAL call on the stock and our RM14.40 FV.

Within estimates. Public Bank’s 1HFY12 annualized earnings were in line with both consensus and our full-year estimates, with the 1HFY12 numbers representing 49.3% of our full-year earnings estimates.

Moderate overall growth. The group’s 1HFY12 earnings grew by a subdued 2.8% y-o-y as persistent net interest margin (NIM) pressure and rising overhead costs crimped overall growth. Pre-provision operating profit ticked up by a very marginal 1.6% y-o-y due to: (i) further pressure on NIMs, which dipped 10bps, ii) higher overhead expenses (+8.8% y-o-y ), and (iii) a 23.6% contraction in new unit trust sales income, which resulted in the pedestrian profit growth. As such, the 2.8% earnings growth was largely shored up by a 12.5% drop in loans loss provision.

Group loans marginally below estimates. The group’s1HFY12 gross loans rose at an annualized pace of 11.3%, which is lower than our projected 12.0%, largely owing to a 5.1% contraction in loans from its Hong Kong operations, which dragged down the domestic annualized loans growth of 12.1%. Management is now guiding for group overall loans growth of 10% to 11%. Within the domestic loans portfolio, hire purchase (HP) was the key drag, with an 8.2% y-o-y growth on an annualized basis, while residential and non-residential property loans growth remained robust at 16.1% and 23.2% respectively vs 2011’s 17.6% and 16.5%. The loan-to-deposit ratio was steady at 87.7% but was largely sustained by stronger wholesale deposit growth, which grew at an annualized 16.3%. Meanwhile, core deposits grew at a slightly slower annualized rate of 10.1% vs the group’s loans growth of 11.3%.

Superior overall asset quality sustained. Overall gross impaired loans dipped 3.3% q-o-q, with all key geographical operations registering an improvement: Malaysia: -3.7% q-o-q, Hong Kong and China: -0.9% q-o-q while Cambodia remained relatively flat q-o-q. As a result, the group’s loans loss coverage ratio continued to go up post MFRS139 adoption to 122.9% from 117.1% in 1Q12, while the gross impaired loans ratio remained steady at 0.8%.

Guidance for dividend payout ratio of 40% to 50%. Given the need to conserve capital in anticipation of providing for Basel 3 counter-cyclical buffers amid a challenging operating environment in terms of growth and persistent margin pressure, the group is moderating downwards its dividend payout ratio guidance to a 40% to 50% range vs the original guidance of close to 50%. Assuming that the group maintained its FY11 absolute net DPS at 48 sen, this would translate into a net dividend payout ratio of 44% for FY12, which implies further ROE compression.

Maintain NEUTRAL, FV of RM14.40. Despite our view of the group being a solid investment during times of uncertainty given its superior asset quality, a dampened growth outlook and margin compression will be the key challenges for 2012, with a dividend upside surprise unlikely to materialize in the immediate to medium term. Given the limited upside in dividend payout amid slower consumer lending growth and persistent NIMs pressure, we are maintaining our NEUTRAL recommendation on the stock as well as our FV of RM14.40.

Source: OSK