Property loans a key driver for Public Bank

Public Bank Bhd
(Feb 7, RM19.08)
Maintain buy with target price of RM20.50. Public Bank’s net profit of RM1.025 billion (+4.5 year-on-year [y-o-y], -2% quarter-on-quarter [q-o-q]) for the fourth quarter ended Dec 31 of financial year 2013 (4QFY13) and RM4.06 billion (+6.2%) for full FY13 were in line with our estimates, representing 98% to 99% of our full-year forecasts.

Earnings growth was supported by: (i) net interest income growth of 6% y-o-y for 2013 on the back of 11.8% loan growth but partially tempered by 4QFY13’s 0.5% q-o-q contraction as a result of five-basis point q-o-q compression in net interest margins (NIM); (ii) non-interest income grew 6.2% on the back of a 9.4% y-o-y growth in service fee and commission income — within its fee income growth drivers, fees from its unit trust division registered the strongest growth at 17% y-o-y with total assets under management (AUM) expanding 14.5% y-o-y to RM62.5 billion, further reinforcing its market share from 40.8% in 2012 to 41.2% in 2013; and (iii) cost gapping benefit from well-contained costs helped to bring down the group’s cost-to-income ratio (CIR) to 30.7% in 2013 from 31.2% in 2012.

Loan growth of 11.8% for 2013 came in at the upper end of management’s 11% to 12% full year growth target. Residential properties (+16.4% y-o-y) and non-residential properties (+17.8% y-o-y) were the key growth drivers. As such, Public Bank continued to expand its market share within the residential and non-residential loan segment to 19.6% and 33.8% respectively from 19.1% and 33.7% at end-2012.

Hire purchase (HP) growth rate moderated from 8.9% in 2012 to 6.8% in 2013. Although the slowdown in HP growth was in line with the industry’s, overall growth remained stronger than the industry’s HP growth of 6.6% in 2013.

As expected, gross impaired loans in 4QFY13 stabilised following 3QFY13’s lumpy uptick of 5.5% q-o-q. To recap, the slight uptick in 3QFY13 was attributed to a one-off reclassification of certain special mentioned loans within its HP and property loans portfolio.

Despite the stabilisation in overall impaired loans trend in 4QFY13, we noted that its HP portfolio continued to reflect a slight deterioration with absolute impaired loans rising 5.4% q-o-q. However, this was more than offset by continued improvement in working capital and residential property impaired loans both declining 3.5% and 0.4% q-o-q, which resulted in overall gross impaired loans declining to 0.7% from 0.8% in 2012. Credit cost declined to 17 basis points (bps) in 4QFY13 from 19bps in 3QFY13 while full-year 2013 credit cost increased 2bps to 17bps. Despite the increase in overall credit cost, 2013’s credit cost of 17bps is still within management’s guidance of under 20bps.

The group reported a 5bps q-o-q compression in NIM to 2.32% in 4QFY13 versus the nine-month period up to Sept 30 of FY13’s average NIM of 2.36% to 2.37% as a result of an 18.7% q-o-q increase in interest expense from new subordinated debt securities raised during the quarter. Management had guided for a milder 8bps to 10bps compression in NIM for 2014 versus 2013’s 12bps compression on the back of better loan pricing discipline.

Management has moderated its loan growth target for 2014 to 10% to 11% versus 2013’s growth of 11.8%. Nevertheless, the group is still confident of sustaining its loan growth at above industry rate, where it expects potential moderation to a more sustainable 8% to 9% growth, which coincidently is in line with our expected industry loan growth forecast for 2014. We are maintaining our loan growth forecast for 2014 at 10.5%. Our loan growth estimate for 2014 is reasonable as it implies that Public Bank is expanding its loan books by only 1.2 times to 1.3 times that of industry’s versus its three-year historical average loan growth to industry growth ratio of 1.3 times to 1.4 times.

Despite an expected moderation in its loan growth target for 2014, which is in line with a general slowdown in industry growth, the group is still confident of sustaining overall growth above that of the industry as it is likely to experience a milder impact on its loan growth from the recent property cooling measures introduced by the government.

We believe the group’s stringent mortgage approval and underwriting standards would have taken into account the effects of the recent property cooling measures even before the announcement of such measures. For example, the group would typically mark down its margin of financing for properties that incorporate elements of rebates in gross selling prices.

We make no changes in earnings forecasts. Key risk could lie in a larger than expected equity capital raising exercise to shore up its group core equity Tier-1 ratio from the current 8.2% level, which would place some pressure on return on equity and hence current premium valuations.

In view of increasing concerns over industry-wide asset quality and rising cost pressures, we believe that Public Bank will continue to outperform. The stock has continued to outperform the KLCI by 2.6% year-to-date in 2014 and 11.8% in 2013.

Maintain “buy” at target price of RM20.50. Share price catalyst will be stronger than expected loan growth, lower than expected provisions and capital raising. — UOB KayHian Research, Feb 7


This article first appeared in The Edge Financial Daily, on February 10, 2014.