Public Bank Bhd’s (PBB) potential partial write-back in management overlay and increase in dividend payout ratio, as the bank raised its dividend policy from a payout of 50% in FY22 to above 50% starting FY23, is the premise for CGS-CIMB to retain its ADD call on the bank.
“We (also) maintain our FY23-25F forecasts and DDM-based target price of RM5.25 (cost of equity of 9.3%; terminal growth rate of 4%),” it said today (Dec 12) in its Company Note.
In CGS-CIMB Regional Financial Conference on Dec 7, PBB was represented senior chief operating officer Chang Siew Yen and chief financial officer Yik Sook Ling.
“For its outlook, the bank sees better prospects for loan growth in 2024F, as it expects stronger economic growth and that the various initiatives implemented by the government will improve Malaysia’s economic environment.
“Although there could still be pressures from deposit competition on banks’ NIM, PBB thinks its NIM performance would be better in
2024F than its guidance of a less-than-20 basis point (bp) contraction in 2023F,” it said.
The research house said Public Bank’s management overlay remained high at RM1.8 billion at end-Sep 2023.
“At this juncture, the bank does not have any definite plan for write-back in management overlay (in terms of timing and magnitude) and stated that it would consider a write-back in management overlay should the global economic climate improve.
“We estimate that every 10% writeback in management overlay would lift PBB’s FY24F net profit by 1.8%,” CGS-CIMB added.
It added that the bank thinks the contributions from its Hong Kong operations to its profit before tax (PBT) would increase in 2024F due to potential reduction in US Fed Fund rate, which could lead to the expansion in the NIM of its Hong Kong operations.
“However, the long-term revenue growth remains challenging in Hong Kong due to stiff competition in the market there, according to the bank.
“PBB sees better business growth prospects in Cambodia and Vietnam especially with its strong market position as the largest foreign bank in Cambodia. It has been aggressively expanding its branch network in Vietnam, raising its number of branches from 29 in 2021 to 40 in Nov 2023.”
The downside risks to CGS-CIMB’s call are a marked slowdown in loan growth and material deterioration in asset quality.
