Public  Bank’s  strong  share  price  performance  over  the  past  week implies that its valuations are now relatively less attractive vs peers. We think investors should take the opportunity to switch out of Public Bank into liquid, large-cap peers such as Maybank and CIMB, which still have attractive  valuations  and  offer  better  leverage  to  the  ETP  and  capital market activities. Maintain OVERWEIGHT on the sector.

• Public Bank’s share price performed strongly last week. Public Bank(PBK  MK,  NEUTRAL,  FV:  MYR18.70)’s  share  price  surged  8.6%  last week.  We  believe  this  was  mainly  driven  by  its  corporate  exercise  to merge its foreign and local shares (merge shares to trade from 16 April), as this  will lead to an increase in weighting of  certain global indexes due to  a  higher  free  float  factor.  Currently,  only  foreigners  holding  PBB-F shares (30% of share capital) have voting rights and this has capped the share’s  investability  weighting  in  FTSE  and  MSCI  indices.  Note  that FTSE has confirmed that the merger will raise Public Bank’s investability weighting to 80% from 30%.  However, domestically, we understand the exercise will not impact Public Bank’s weightage in the FBM KLCI.
• Valuations  now  less attractive.  Following  its  share  price  rally,  Public Bank now trades at  a  16.7x 2014 P/E and 3.2x 2014 P/BV,  vs  its  longterm average P/E of 15x and P/BV of 3.1x.  While portfolio rebalancing activities  by  global  funds  may  see  Public  Bank’s  share  price  remain elevated,  fundamentally,  we  think  its  current  valuations  are  less attractive  given its weaker growth prospects (10-year net profit CAGR of 15.5% vs  2014F: 7.5%) and structurally-declining ROEs (2014F:  20% vs10-year average of 22%).
• Switching  to  cheaper,  large-cap  banks.  Investors  who  need  to  stay invested  in  large-cap,  liquid  banking  stocks  may  wish  to  consider switching  out  of  Public  Bank  into  Maybank  (MAY  MK,  BUY,  FV: MYR11.70)  or CIMB  (CIMB MK, BUY, FV: MYR8.50).  The valuation gap between  Public  Bank  and  Maybank/CIMB  has  widened  further  and  is now  significantly  above  long-term  averages.  Public  Bank  is  currently trading  at 2014 P/E and P/BV premiums of 33% and 88% respectively over  Maybank, vs  the 10-year average P/E  and P/BV  premiums  of 10% and 67% respectively. Relative to CIMB, the P/E and P/BV premiums are currently 37% and 100% respectively, vs   the 10-year average P/E and P/BV  premiums  of  8%  and  73%.  We  think  the  valuation  gap  should close, especially given that the ROE spread between Public Bank and Maybank/CIMB has narrowed in recent years (see Figures 4 and 6).
• OVERWEIGHT on  sector.  We do not discount the possibility  of  Public Bank’s  strong  share  price  performance  sparking  interest  in  the  sector. We continue to like banks that offer strong leverage to corporate lending and capital market activities eg  Maybank and CIMB. We also like Hong Leong  Bank  (HLBK MK, BUY, FV: MYR16.60)  for its  growth  prospects now that its post-merger restructuring activities are largely done.

Source: RHB