Public Bank Berhad - Initiation
Wed, 04-Dec-2024 06:56 am
by Samuel Woo • Apex Research

Counter

PBBANK (1295)

Target Price (RM)

5.13

Recommendation

Buy

Investment Highlights

 

  • Industry-leading ROE and stable earnings. PBK’s 12-13% ROE is among the industry's highest. There are two main factors: (i) The lowest cost/income ratio in the industry due to its excellent cost control, and (ii) Low provisioning charges due to excellent asset quality.

 

  • We think PBK’s dividend certainty is very high. This is because PBK’s earnings are also much more stable than most industry peers for several reasons: (i) It has a very low NOII dependency, as the proportion of topline consisting of NOII is c.20%, which implies the overwhelming remainder is from traditional lending and deposit taking activities, (ii) Of its NOII contribution, only a small portion comes from non-fee income (which tends to be more volatile), (iii) Its strong asset quality prevents any instances of large impairments from happening. 

 

  • Defensive pick, given high asset quality and low NCC. PBK’s GIL ratio of 0.53% is currently among the lowest in the industry. As a result, its NCC is also very low, usually <5bps. Its LLC of 154% is also among the highest in the industry (especially given the heavily collateralised nature of its loanbook), implying that there is room for a few more writeback instances.

 

  • Its excellent asset quality is attributable to two main factors: (i) PBK practises very strict underwriting standards, (ii) Its loan portfolio is mostly retail (particularly residential mortgages and hire purchase loans), which tends to be safer than non-retail loans. While the Group seeks to grow its commercial (SME) book, we doubt this will significantly impact asset quality.

 

  • Moving towards a more well-rounded NOII profile. PBK has historically been overly dependent on Public Mutual’s unit trust contributions. (For context, Public Mutual is Malaysia’s largest private unit trust company, with the largest retail market share of c.38%.) 

 

  • Recently, management seems to be working towards amping other sources of NOII, including reworking its insurance (via the acquisition of LPI capital) and overseas contributions (via the acquisition of RHB’s stockbroking business in Vietnam). We see this as a positive, as other banks heavily invest in the NOII space – implying that PBK needs to maintain a competitive edge or risk being left in the dust.

 

  • Potential upside to rising dividend payout. Management has made it a point to steadily increase PBK’s dividend payout ratio over time. The intention is to increase it to 60% from the c.55% level it is currently at. Given the Group’s high capital accretion from profit, we think there's upside potential: Management has indicated that its optimal CET 1 ratio is 13%, still far below the current level of 14.3%. Note that PBK usually gives out full cash dividends as well.

 

Valuation & Recommendation

  • We initiate coverage on PBK with a BUY recommendation and a target price of RM5.13 based on an FY25F PBV of 1.61x GGM-PBV valuation. (GGM Assumptions: FY25F ROE of 12.5%, LTG of 3.5%, & COE of 9.1%.) 

     

  • We favour PBK for its (i) High ROE level and stable earnings, (ii) Defensive characteristic due to its high asset quality and low NCC, and (iii) Its move towards a more well-rounded NOII profile, and (iv) Potential upside to rising dividend payouts.

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