Public Bank - Stronger top line growth in 3Q Buy

- We are maintaining our BUY rating on Public Bank Bhd (PBB), with a higher fair value of RM17.00/share (vs. RM16.70/share previously), as we roll forward to FY13F. Our new fair value is based on FY13F’s ROE of 22.5% (vs. FY12F’s 22.9%) and P/BV of 3.0x (vs. 3.3x previously). 

- PBB’s 3QFY12 net earnings came in 1.2% above consensus forecast. Loans growth was stronger at an annualised rate of 11.3% (ahead of earlier guidance of 9%-10%). More importantly, NIM was stable and unchanged at 2.5%, the third consecutive quarter of stable NIM. This is positive considering widespread expectations of declining NIM for the industry. The sustained NIM came largely from stabilisation in retail loan yields in the past few quarters. 

- Fee income turned out to be quite strong with a 4.0% QoQ growth, largely due to stronger forex income. We understand these are realised forex gains stemming mainly from better spreads and volumes arising from thirdparty business. 

- The absolute level of its gross impaired loans had been reduced further by 0.6% QoQ, despite a higher loan base. Gross impaired loans ratio improved further to 0.7% in 3QFY12 from 0.8% in 2QFY12. Loan loss cover strengthened to 124.5% in 3QFY12, from 122.9% in 2QFY12. Credit cost remained low at only 17bps in 3QFY12, compared with 18bps in 2QFY12. This is in line with the company’s guidance of credit cost likely to be around circa 20 for FY12F.

- PBB has also announced a sustained group common equity ratio of 8.0% in 3QFY12, which we understand is based on Bank Negara’s more conservative concept paper. - PBB’s 3QFY12 results are positive in terms of:- (a)steadier-than-expected NIM; (b) continuing improvement in absolute NPL, despite a higher loan base; (c) better-thanexpected forex income; (d) sustained capital ratio. 

- The company said it is maintaining its growth strategy in the three key selected segments. In addition, the company has assured that it has already overlaid and built-in another layer of risks in its LGD estimates for the auto segment, which means little risk of high loan loss provision for its auto segment ahead. 

- We believe PBB deserves a justified premium considering its lower risk profile, and predictable and comfortable growth strategy.  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