Kenanga Research has maintained its Outperform call on Public Bank Berhad (PBBANK) with a target price of RM5.95 after the lender’s first-half FY26 earnings met expectations, supported by above-guidance loan growth, stronger non-interest income and disciplined cost management.
Public Bank recorded a net profit of RM3.58 billion for 1HFY26, up 2% year-on-year, accounting for 48% of both Kenanga’s and consensus full-year forecasts.
The bank declared an interim dividend of 10.5 sen per share, unchanged from 1HFY25 and in line with expectations.
Kenanga expects Public Bank’s Basel III-related capital release component to take effect in 4QFY26, which could pave the way for additional capital returns to shareholders.
Loan Growth Remains Above Guidance
Public Bank’s loan book expanded 5.9%, while domestic loans grew at a stronger 6.2%, remaining ahead of management’s unchanged full-year loan growth guidance of between 4% and 5%.
Kenanga said the bank continued to gain market share across various segments, with particularly strong growth in domestic small and medium enterprise (SME) lending and hire purchase financing.
Domestic SME loans expanded at an annualised rate of 12.1%, while hire purchase loans grew 6.5% on an annualised basis.
However, net interest margin (NIM) remained under pressure, declining six basis points from 2025 levels, albeit still within management’s guidance.
Public Bank has refined its NIM outlook to a mid-single-digit basis-point decline, removing its earlier expectation that margins could potentially remain stable year-on-year. Kenanga expects NIM to decline by four basis points for FY26.
The bank is also tapping alternative funding sources, including commercial papers, as part of efforts to reduce its funding costs.
Non-Interest Income Drives Operating Profit
A key earnings contributor during the period was non-interest income (NOII), which increased 12% year-on-year in 1HFY26, significantly outpacing the 0.5% growth in net interest income.
The increase was largely driven by unit trust income, which surged 29% year-on-year as funds under management expanded by a robust 12% year-to-date.
As a result, non-interest income accounted for 24.1% of Public Bank’s total income during the first half.
Pre-provision operating profit (PPOP) increased 3.4%, also supported by tight cost management.
Operating expenses edged up just 2.4%, although Kenanga estimated the increase would have been around 4% excluding currency effects. The bank’s cost-to-income ratio stood at a healthy 35.1%.
Hire Purchase Asset Quality Remains Manageable
Kenanga noted some deterioration in Public Bank’s hire purchase portfolio, although it believes the risks remain manageable.
Gross impaired loans (GIL) in the hire purchase portfolio increased to 28 basis points from 23 basis points a year earlier.
Credit cost for the portfolio was higher at 22 basis points, compared with Public Bank’s overall credit cost of seven basis points for 1HFY26.
Nevertheless, domestic loans with payments overdue for no more than three months remained at a comfortable 1.2%, lower than in 2025.
Public Bank’s Pillar 3 disclosures for 1H26 also showed that past-due but not impaired transport loan balances remained stable.
The bank does not expect to write back its RM800 million provision overlays during the remainder of the year, reinforcing Kenanga’s view that credit cost risks remain manageable.
Public Bank’s loan loss coverage ratio stood at 139%.
Special Dividends Could Lift Shareholder Returns
Kenanga left its earnings forecasts unchanged and reiterated expectations for additional capital distributions to shareholders.
The research house has pencilled in special dividends totalling about 5.9 sen per share over the next three years as Public Bank releases surplus capital, alongside an expected improvement of close to 50 basis points in return on equity (ROE).
This would come on top of management’s guidance to increase its ordinary dividend payout ratio to 60% for FY26.
Kenanga estimates the additional special distributions could contribute to a dividend yield approaching 6%.
The research house maintained its RM5.95 target price, based on a Gordon Growth Model incorporating a long-term ROE assumption of 13.5%, reflecting the anticipated benefit from Public Bank’s capital return plan.
Its other valuation assumptions remain unchanged, comprising a 9.4% cost of equity and 4% terminal growth rate, translating into a price-to-book value of 1.78 times based on forecast FY26 book value per share of RM3.18.
Kenanga also applied a 5% premium to its valuation based on Public Bank’s four-star ESG rating, supported by the lender’s strong green financing pipeline.
