Public Bank - Reaching fair valuation, rating lowered

We maintain our view that there is still great potential for Public Bank (“PBBANK”) to grow given the strong retail and business banking franchises of the bank. However, as the market has now priced in the growth potential and its share price is already trading at the historical premium to the average of its big-cap peers' valuation, the stock now appears less attractive at this juncture. As such, we are downgrading the stock to a MARKET PERFORM with an unchanged Target Price of RM16.80 (3.0x FY13 P/BV, implying 13.0x FY13 PER). 

Reaching the targeted valuation.  The valuation on PBBANK has been on the rise again over the last couple of months and hitting historical highs in the process. Following its rally from RM13.50 in mid-2012 to RM16.00 in Jan-2013 or a rise of +19%, PBBANK’s share price has outperformed the KL Finance Index as well as its big-cap peers namely CIMB and Maybank. We think that the abated concern on its capital raising issue was the main reason for the strong share price performance.  

The stock is now trading at a significant premium to the average P/Bv multiples of its big-cap peers by 61%, up from 2011’s low of 48%. This has brought its FY13 P/BV to a more demanding level of 2.9x currently. PBBANK is also trading at a 10% premium to its average big-cap peers (from a discount previously) of Malayan Banking (“MAYBANK”) and CIMB (“CIMB”) on a price earnings basis. The premium likely reflects the bank’s strong earnings execution.  

Meanwhile, PBBANK is due to report its 4Q12 results at the end of this month, which should show a mid-to-low single-digit QoQ revenue growth in the range of 2%-5%. A compression in its margin is likely to offset the boost given by its anticipated 3% QoQ (or +13%  YoY) forecast loan growth and 2% QoQ growth in its non-interest income. We are expecting a lower NIM for the quarter at 2.48%, -2bps QoQ. Nonetheless, we still expect the banking group to register a profit after tax of RM990m in 4Q12, 1% higher than 3Q12’s RM983m. This is because we see a continuous normalisation in the bank’s credit cost to 14bps for 9M12 with management also guiding for a <20bps. This would be partly gained also by a lower operating cost with a 30% cost-to-income ratio. The full year FY12 PAT (expected at RM3,867.0m) should be in line with ours and the street’s estimate.  

Rating downgraded but TP maintained.  Given its optimistic earnings expectation (EPS growth of 7% for FY13 and 14% for  FY14), PBBANK’s headline ROE number of 25% appears reasonable to command a 3.0x P/BV valuation. PBBANK has continued to maintain its dominant market share by taking a calculated risk approach and having a quality franchise as well as operating efficiency with a cost-to-income ratio of just 30.0% in 3Q12 vs. the industry’s 46%. Its valuation is high at 3.0x book value but we think this is justified given its 25% ROE, high liquidity position (87% LDR), strong credit quality (117% NPL coverage) and improved CAR to slightly above 8%.

Nonetheless, the strong fundamentals could have been priced as the stock currently trading near 3.0x FY13 P/BV, a level higher than +1SD of its historical average P/BV. The stock hence is less attractive at this juncture given the high valuation above. Besides, to recap,  we see limited trading upside for PBBANK for now as (i) the share price has gone up by +19% since June 2012, (ii) it trades near 3.0x P/BV and (iii) the share price being at a significant premium currently to the average multiple of its big-cap peers. All told, we are downgrading our rating on PBBANK to a Market Perform with an unchanged target price of RM16.80.

Source: Kenanga