Public Bank - Better gauge of true value under fair value accounting BUY

Stock Name: PBBANK
Company Name: PUBLIC BANK BHD

Research House: AMMB

Price Call: BUY

Target Price: 16.70

- We aremaintaining our BUY rating on Public Bank Bhd (PBB), with a higher fair valueof RM16.70/share (vs. RM15.50/share previously). This is based on an ROE  of 23.3% FY12 (previously 22.7.0%) and ahigher book value of RM4.94/share (previously RM4.72/share) FY12F. This leads toa fair P/BV of 3.4x (3.3x previously).                              

- Ourlatest company visits confirms that PBB should be on track to full adoption of FRS139. This is positive on two fronts.Firstly, in terms of balance sheet, we foresee that PBB should be able to write back at least RM700mil to itsshareholders funds, from previously accumulated historical collectiveassessment (similar to general provisions) which is essentially not required inthe case of PBB. This is expected to boost book value by 4.7%, to RM4.94/share(from RM4.72/share) FY12F. 

- Secondly,we also expect credit costs to be much lower ahead. This is because under fulladoption of FRS139, collective assessment rate (as a percentage of gross loansless individual assessment) should be at the most 1%, vs. the current 1.5%being adopted under the transitional provision of FRS139 by PBB. 

- Thismeans that the collective assessment charge on every new incremental new loanshould also be lowered to 1%, from the current 1.5%, which would lead to lower collectiveassessment expense in the P&L. Overall, we foresee credit costs lowered to 23bps FY12F (from 36bps previously). 

- Ourearnings have been upgraded by 5.5% for FY12F. With this, we have also liftedour dividend forecasts accordingly, to RM0.53/share (from RM0.503/share) FY12F.Dividend payout ratio is still at 49.8%, in line with the company's guidance of50%. With the latest upgrade, we now foresee dividend rising by 10% (previously5%) YoY in FY12F. 

- We expectthe greenlight to be given for PBB's full adoption of FRS139 by its 1QFY12,which is likely to be released in the next couple of weeks. In terms of P/BV, thishas immediate positive impact as it should lower P/BV to 2.8x, which is thetrough levels hit by PBB during the 2008 crisis. 

- Weforesee rerating catalysts from:- (a) steady rise in absolute NDPS; (b)confirmation of benign impaired loans and credit costs; and (c) possible liftto book value with full adoption of FRS139.

Source: AmeSecurities