Public Bank remains a Hold at CIMB Research on rich valuations

KUALA LUMPUR: CIMB Equities Research is retaining its Hold call for Public Bank due to its pricey valuations.
“We retain our FY17-19F EPS forecasts and dividend discount model-based target price of RM19.50,” it said on Wednesday.
Although Public Bank’s1H17 net profit accounted for only 45.7% of our full-year forecast (and 48.9% of Bloomberg consensus estimates), CIMB Research regarded the results as in line as 2H is traditionally stronger than 1H.
“We also see the interim net DPS of 27 sen as largely in line with our expectations. We retain our FY17-19F EPS forecasts and DDM-based target price of RM19.50,” it said.
Public Bank’s net profit only advanced by 3.8% on-year in 1H17, mainly dragged down by the 0.7% on-year drop in non-interest income. The 1H17 non-interest income was mainly weighed down by weaker investment income and foreign exchange gains.
On a positive note, net interest income rose by a strong 8.3% on-year in 1H17, thanks to margin expansion. Also, 1H17 loan loss provisioning plunged by 31.9% on-year.
“Loan growth eased from 7% on-year in March 2017 to 5.3% on-year in June 2017, the weakest since we first compiled the quarterly loan growth in 2003.
“This was dragged down by (1) the slowdown in property loan expansion – from 10.3% on-year in March 2017 to 9.1% on-year in June 2017 for residential mortgages and from 6.8% on-year to 4.3% on-year for non-residential mortgages and (2) the widening of the contraction in auto loans from 1% on-year in March 2017 to 2% on-year in June 2017,” it said.
But the growth in working capital loans was sustained at 8.3% on-year in March-June 2017.
Public Bank’s gross impaired loan ratio was stable at 0.5% as at end-March and end-June 2017.
Although loan loss coverage fell from 104% as at end-Mar 17, it remained comfortable at 98.1% as at end-June 17.
“In spite of its strong fundamentals, we rate Public Bank as a Hold in view of its rich valuations. Its FY18 P/E of 12.7 times and price to book value of 1.9 times are among the highest in the sector, while its FY17F dividend yield of 3.5% is below the sector’s average of about 4%.
“An upside risk to our call is a strong pick-up in loan growth, while a key downside risk is a drastic deterioration in asset quality,” it said.
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