Public Bank - Justified premium for earnings resilience Buy

- We maintain our BUY 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.      

                        

- For the auto loans segment, PBB hinted that the recent speculation of a possible reduction in excise duties may have led to some potential car buyers holding back, but the trend is now normalising. The company believes this is because of expectations now that any decline in prices will likely be gradual.

- While expectations remain of a possible excise duty reduction if a National Auto Policy (NAP) is unveiled, PBB remains unperturbed about possible lower car prices. It believes that any reduction in car prices, if any, will likely be marginal. 

- If car prices were to decline, it expects two major areas of impact. Firstly, the average loan value is expected to decline, but this is likely to be offset by higher demand. Thus, it foresees an insignificant impact on loans growth. 

- Secondly, there may be some impact on loan loss provisions. Nonetheless, PBB itself does not expect to experience much of an impact given that it has very low gross impaired loans in auto. 

- There may be adjustments as well through its loss given default (LGD) assumption, but in PBB’s case, the company hinted that it has already overlaid and built in another layer of risks in its LGD estimates. We understand that PBB’s current LGD assumption has already reflected car prices possibly being lowered by more than 20% the current market prices. Thus, it does not foresee any major changes to its LGD estimates either. 

- The company has also not experienced any major signs of stress for any particular parts of its loans portfolio, and still expects credit cost to be less than 20bps for FY12F.

- PBB hinted its dividend payout ratio to be close to the 48% achieved in FY11, and is targeting for absolute dividend to rise given a likely increased earnings base. Consensus earnings forecast is RM3,831mil FY12F and DPS forecasts is RM0.55.

- Our latest company visit affirms that Public Bank’s earnings will continue to be more resilient, despite ongoing concerns over possible lower vehicle prices. At this current cycle of possible slowdown, we foresee new re-rating catalysts for PBB stemming from:- (a) earnings resilience and predictability, (b) steady rise in absolute DPS; (c) confirmation of benign impaired loans and credit cost; and (d) gradual increase in common equity ratio, implying less of a possibility of a rights issue by 2015.  

Source: AmeSecurities