By A. Stephanie
Despite Public Bank Berhad’s (PBB) strong start to the year, with a RM1.17 billion net profit for the first quarter of 2015 (1Q15), TA Research has downgraded the counting house’s stock to “sell” from its previous “hold” recommendation in January due to limited upside of below 10%.
For the quarter, PBB posted profit before taxes of RM1.49 billion, up 12.3% from RM1.32 billion the previous corresponding quarter. Net profit of RM1.17 billion was healthy as well, accounting for 24% and 25% of TA’s and consensus full year estimates of RM4.88 billion and RM4.73 billion respectively.
Maintaining the share’s target price at RM20.30, TA said, “Given that share price has risen since our upgrade report dated Jan 28, the upside is now limited to less than 10%. With that, we downgrade PBB from hold to sell.”
Its analyst noted that whilst PBB registered seasonally weaker quarter-on-quarter (q-o-q) results, the group’s year-on-year (y-o-y) net profit climbed 15.2% on the back of stronger income growth of 9.8% and a 10.7% dip in loan impairment allowances.
PBB’s annualised return on equity (ROE) stood at 17.1% from 19.9% in December 2014, partly due to the issuance of 350.2 million new shares, the research house said.
TA Research continued, “Net interest income accelerated at 9.4% y-o-y to RM1.53 billion, supported by ‘consistently above-industry’ annualised loans growth of 13.1% driven by domestic loans growth of 12.1%.
“PBB’s domestic loans market share climbed to around 17.3% from 17.1% in 2014. As expected, net interest margin continued to dip, easing by some five basis points q-o-q to 2.15% from 2.24% the previous year,” it noted.
By segment, the banking giant’s overseas operations continued to pick up, with loans in Hong Kong and Cambodia climbing 7% and 3% year to date respectively. Overseas operations accounted for 7% of the group’s loan portfolio.
Retail operations comprising individuals and small and medium enterprises (SMEs), combine with hire purchase business to account for more than 80% of total loans profit. Domestic SME financing grew 6.9% for the year to date while the analyst observed steady growth in residential and commercial properties financing.
Deposits expanded 12.8% YoY in tandem with loans growth, with PBB having a 15.8% market share in customer deposits, driven by current account and fixed deposits growth. The banking group’s net loan to deposit ratio now stands at 88%.
TA Research commented that while it does expect bumpier provisions in 2015 for the banking sector in general, credit charge could remain fairly stable for PBB due to its high mix of retail loans, which are less lumpy compared to the corporate portfolios.
It continued, “Earnings will also be supported by healthy loans growth, which management believes would again surpass industry’s average due to its hire purchase, mortgage and SME portfolios. PBB guides for 2015 loans growth for 2015 at 9%-10%, above the industry’s 8%-9%.
“Some downside risk to earnings include further margin compression as deposit costs rise, underpinned by lackluster deposit growth, especially current and savings account deposits. Other factors driving up deposit costs would be if loans growth outpaced that of deposits, and new liquidity coverage ratio rules favoured banks holding more retail deposits.
“However, given the intense competition for deposits in the industry, we believe PBB may resort to offering attractive deposit promotions to strengthen its deposit base. We continue to forecast more margin compression for PBB in 2015, with management guiding at eight basis points in tandem with industry peers,” TA Research said.
As of 11.30am today, PBB’s share price on Bursa Malaysia stood at RM19.64, up 4 sen or 0.2% from its previous closing price of RM19.60.
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