Tuesday, July 26, 2011

Public Bank Earnings Evaluation - Overweight

26 July 2011
Price Target: RM14.22
Share price: RM13.36


Results
2QFY11 net profit of RM880.4m (+6.4% qoq; +19.9% yoy) took 1HFY11 to RM1,708m (+20.3%) was in line as it accounted for 50% of HLIB and consensus forecasts.

Deviations
Largely in line.

Dividends
Single-tier first interim of 20 sen (on net basis, higher than 25 sen gross in 1HFY10) with ex and payment dates on 5 and 17 Aug respectively.

Highlights
# 2QFY11 loan growth of 13.2% (domestic 14.9%) yoy was driven by HP, property and SME as well as sharp jump in loans for the purpose of M&A, in line with management’s target of 14-15% and our assumption of 13%. The recent new HP act lengthened registration process but has no significant impact on loans growth target.

# Earnings growth mainly driven by loans growth, higher NIM (from OPR hike), higher non-interest income (mainly Public Mutual) better CIR (cost increased at slower pace) and lower LLP (lower credit charge).

# Guiding for lower NIM ahead as liabilities re-pricing catch up (from OPR hike) and competitive pressure. FY11 NIM expecting 10-15bps decline yoy.

# Asset quality continued to improve with both impaired loan absolute amount and ratio reduced while LLC continued to increase. Impaired loan formation also improved slightly.

# Suspect minimum common equity ratio could be 10-10.5% (7% Basel III minimum plus counter cyclical buffer, additional buffer from Pillar 2 of Basel II and additional
prudential buffer). Unless the minimum requirement is accelerated and/or higher than expected, there is no need for cash call.

Risks
Unexpected jump in impaired loans and lower than expected loan growth. Uncertainty about quantum of Basel III counter cyclical buffer for capital ratios.

Forecasts
Unchanged.

Rating - HOLD
Positives:
- Above industry asset quality, ROE and yield;
- Excellent track record in delivering guidance and consistency in growth.

Negatives:
- Dividend payout lower than previous years and uncertainty about quantum of counter cyclical buffer.

Valuation
Target price unchanged at RM14.22 based on Gordon Growth with ROE of 24.4% and WACC of 9.3%.


Source: HLIB Research

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