Date: October 1, 2024
Broker: UOB Kay Hian

Sector Context

Public Bank was highlighted in UOB Kay Hian’s October 1, 2024 report as one of the sector laggards in the Malaysian banking industry, which could offer better risk-reward opportunities. The overall sector is experiencing a slowdown, with loan growth tapering off to 6.0% in August 2024 (from 6.4% in July), mainly due to weaker business loans. However, household loans remained stable, growing by 6.5% compared to 6.4% in the previous month.

Market Weight Recommendation

UOB Kay Hian maintains a MARKET WEIGHT stance for the banking sector, citing that earnings growth for 2024/2025 is expected to lag behind the broader market. The sector trades at 1.24x Price-to-Book (P/B) value, which is +1 Standard Deviation above its historical mean of 1.13x. In this context, Public Bank is identified as a value pick due to its attractive valuation.

Focus on Laggards

The report advises investors to shift focus to sector laggards like Public Bank, as they trade at more attractive valuations. Public Bank, along with Hong Leong Bank and RHB Bank, is trading at 1 Standard Deviation below its historical mean P/B, making it a favorable option for investors seeking better returns in a slowing sector.

Valuation and Potential

Public Bank’s stock is recommended with a BUY rating, a target price of RM5.35, and a current share price of RM4.56. The bank is expected to benefit from potential credit cost tailwinds, which could boost its performance in the near term. Additionally, UOB Kay Hian points out that Public Bank’s pre-emptive provisions, built up over the past few years, provide a robust buffer against any short-term economic volatility or global macroeconomic slowdown.

Performance Metrics

Public Bank’s expected earnings growth for 2024/2025 is forecasted to be around 8%, which is lower than the broader market’s expected growth. Despite this, the bank’s stable asset quality, with provisions set aside for potential future risks, makes it an appealing choice for long-term investors. Public Bank’s Return on Equity (ROE) is projected at 12.5%, with a Price-to-Book (P/B) ratio of 1.6x and a dividend yield of 4.0%.

Asset Quality and Risk Buffer

Asset quality in the banking sector, including Public Bank, remains stable. The gross impaired loans (GIL) ratio for the sector was recorded at 1.58% in August 2024, with sufficient provisions set aside by Public Bank to cushion any short-term spikes in impaired loans. The provisions serve as a strong buffer, providing confidence that the bank is well-prepared for any downturns in loan quality.

Conclusion
Public Bank stands out as a sector laggard with an attractive valuation and strong fundamentals, making it a compelling option in the current market environment. Investors are encouraged to consider the bank’s long-term potential, particularly given its strong risk management and robust asset quality.