• BUY, new MYR5.30 TP from MYR4.80, 13% upside with c.5% FY25F yield. Public Bank’s 2Q24 results are in line. Despite that, management raised its FY24 ROE target to >12.5% (from 12%) on an improved NIM and credit cost (CoC) outlook. This stock is our quality, defensive pick to tide through the near-term market volatility. A potential pick-up in SME loan growth, a neutral/positive impact from the move to Basel 4 plus management’s increasing recognition of the need for capital management and ROE maximisation should all be incrementally positive for its share price.

• 2Q24 net profit up 8% QoQ (+10% YoY) to MYR1.8bn, bringing 1H24 PATMI to MYR3.4bn (+3% YoY) – at 49-50% or our and consensus FY24 estimate. Its reported 1H24 ROE of 12.8% (FY23: 13%) was ahead of the earlier 12% target, and CET-1 ratio was stable QoQ at 14.5% (2Q23: 14.7%). An interim DPS of 10 sen (2Q23: 9 sen) was declared, translating to a payout ratio of 56.5% (2023: 55.5%). QoQ PATMI growth boiled down to: i) Jump in associate contribution; and ii) MYR120m writeback in overlays (1H24: MYR180m writeback), leaving PBK with a balance of MYR1.6bn in its books.

• NIM eased 2bps QoQ (+1bp YoY). We estimate QoQ NIM pressure was mainly from asset yields – likely as the lower yields from loan origination in recent quarters start to be felt. Yields on quality housing and SME loans are broadly 20-30bps lower vs pre-pandemic levels, due to competitive pressures. The NIM pressure is notwithstanding PBK having already revised down its deposit rates on four occasions. That said, with 1H24 NIM flat vs 2023 and the exit NIM at 2Q’s average, PBK revised its NIM guidance to a stable-to-low single digit squeeze from a stable-to-mid single digit squeeze.

• Loans and deposit targets kept as the 6% annualised growth for both loan and deposit kept pace with targets. YTD, loan drivers are auto (+7%) and residential mortgages (+3%) while corporate accounted for +8% (vs SME: +2% and individuals: +2%). CASA ratio was stable QoQ at 28% (2Q23: 29%) while LDR was marginally higher QoQ (+40bps) at 95.8% (2Q23: 94.2%).

• Impaired loans ticked up, with GIL rising a further 4% QoQ (+22% YoY) mainly from a domestic corporate account under observation but there was no impact on its CoC. With that, GIL ratio rose 2bps QoQ to 0.64% (2Q23: 0.55%) while LLC fell to 154% (1Q24: 169%; 2Q23: 199%). Management guided for a LLC floor of around pre-pandemic levels, ie c. 125%.

• Cause for optimism ahead? This is premised on: i) Efforts to rejuvenate the growth of the SME segment (eg setting up regional SME centres and loan campaigns) are bearing fruit – the approval pipeline is up 20% YoY; ii) as a standardised approach bank under Basel 3, it sees minimal capital impact from the move to Basel 4. As such, iii) PBK is increasingly warming up to optimising capital to maximise ROEs. We raise FY24-26F PATMI by 1%, 1% and 2% and FY24-26F DPS by 3%, 4% and 6%. Coupled with a roll forward in valuations, our TP rises to MYR5.30 (includes a 2% ESG premium).

Source: RHB Research - 28 Aug 2024