PBBANK (FV RM14.40- NEUTRAL) 1QFY12 Results Review: Going at a Slower Pace

Stock Name: PBBANK
Company Name: PUBLIC BANK BHD

Research House: OSK

Price Call: HOLD

Target Price: 14.40

The group reported 1QFY12 results that were largely in linewith consensus and our full-year estimates. The maiden adoption of MFRS139resulted in a write back of excess collective assessment allowance, which  amounts to RM859m. Despite the write backwhich will have the effect of raising its core equity capital ratios by 0.5%,dividend payout is unlikely to rise materially given the need to conserve additionalcapital for Basel 3's counter cyclical buffers of up to 2.5%.  We maintain our NEUTRAL call but with ahigher FV of RM14.40 after incorporating the higher book values from the writeback but partially offset by lower ROEs (ROE of 21.9% and implied FY12 P/BV of2.84x).

Within estimates.Public Bank's 1QFY12 annualized earnings was in line with both consensus andour full-year estimates with 1Q numbers representing 24.8% of our fullyearearnings. The 1QFY12 earnings, which reflected the maiden adoption of MFRS139, grew6.4% y-o-y largely due to lower provisions from loan recoveries and lower collectiveassessment provisions following the slower loans growth. The 6.4% earnings growthalready incorporates a comparable restatement of 1QFY11's provisions on full MFRS139adoption that resulted in lower collective assessment from 1.5% to 0.8%.Preoperating provision profit was up a subdued 3.3% y-o-y and contracted 3.4%q-o-q on the back of: (i) further pressure on NIMs  ' which declined 10bps to 2.5%, (ii) higher overheadexpenses (+10.2% y-o-y and +5.7% q-o-q), and (iii) slower 2.3% sequential loansgrowth vs last corresponding 1Q11's sequential growth of 3.3%.

Impact of MFRS139 'will not give rise to higher dividends. The adoption of MFRS139 will have the effect of releasing RM859m inexcess collective assessment into retained earnings which will, in turn, boostthe group's core equity capital ratio by 0.5% to 8.1% by end-2012. Although theentire write back amount of RM859m is distributable as dividends, contrary toearlier concerns that  Bank NegaraMalaysia may insist on a write back to non-distributable regulatory reserve, webelieve that this one-off write back is still unlikely to prompt an upwardre-rating in recurring dividend payouts as the group still needs to conservecapital for: (i) Basel 3 countercyclical buffers of up to 2.5%, raising thetotal core equity capital requirement to 9.5% by 2015, and (ii) the group's intentionto maintain its current low-teens growth rates. As such, the write back of its excesscollective allowance into core equity tier 1 capital is certainly positive inremoving some initial overhang of a potential equity capital raising exercise.However, because the one-off boost of only 0.5ppts is not sufficient to raisethe group's  core equity capital ratioscomfortably above the 9% level to meet Basel 3's additional counter cyclicalbuffer requirement of up to 2.5%, we believe that the group is likely to retainits existing 50% dividend payout ratio with minimal upside expected.

Source: OSK188